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The Neutrality of Interchange Fees in Payment Systems

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Author Info
Joshua Gans (Melbourne Business School, University of Melbourne)
Stephen King (Melbourne Business School)

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Abstract

There has been considerable public debate over the effect of interchange fees on credit card transactions. Regulators in Australia and Europe have argued that these fees can be set by banks to have an anticompetitive effect. In the US, it has been argued that these fees, together with a rule that prevents a surcharge for credit purchases, might create a cross subsidy between cash and credit customers. Academics have noted that, in particular circumstances, interchange fees have no real effects in the absence of such a no-surcharge rule. This paper demonstrates that the potential neutrality of interchange fees is a general result. We show that in the absence of a no surcharge rule or, alternatively, if there is perfect competition at the merchant level, interchange fees can be changed without leading to any real effects. This result does not depend on the degree or nature of competition at either the bank or the merchant level. We conclude that the elimination of no surcharge rules may provide practical policy solutions for authorities concerned about the level of interchange fees.

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Publisher Info
Article provided by Berkeley Electronic Press in its journal Topics in Economic Analysis & Policy.

Volume (Year): 3 (2003)
Issue (Month): 1 ()
Pages: 1069-1069
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Handle: RePEc:bep:eaptop:v:3:y:2003:i:1:p:1069-1069

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Related research
Keywords: credit card associations payment systems interchange fee neutrality no surcharge rule

Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Jean-Charles Rochet & Jean Tirole, 2002. "Cooperation Among Competitors: Some Economics Of Payment Card Associations," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 549-570, Winter.
  2. Jean-Jacques Laffont, 2001. "Internet Interconnection and the Off-Net-Cost Pricing Principle," Theory workshop papers 357966000000000085, UCLA Department of Economics. [Downloadable!]
    Other versions:
  3. Julian Wright, 2001. "The Determinants of Optimal Interchange Fees in Payment Systems," Industrial Organization 0108001, EconWPA. [Downloadable!]
    Other versions:
  4. Schmalensee, Richard, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Blackwell Publishing, vol. 50(2), pages 103-22, June. [Downloadable!] (restricted)
    Other versions:
  5. Grant, Simon & King, Stephen P, 1997. "The Fiscal Dividend Myth of an Income/GST Tax Switch," Australian Economic Papers, Blackwell Publishing, vol. 36(69), pages 167-78, December.
  6. Bernheim, B Douglas & Bagwell, Kyle, 1988. "Is Everything Neutral?," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 308-38, April. [Downloadable!] (restricted)
    Other versions:
  7. Baxter, William F, 1983. "Bank Interchange of Transactional Paper: Legal and Economic Perspectives," Journal of Law & Economics, University of Chicago Press, vol. 26(3), pages 541-88, October.
  8. Chakravorti, Sujit & To, Ted, 2007. "A theory of credit cards," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 583-595, June. [Downloadable!] (restricted)
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