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Interchange fees and incentives to invest in payment card systems

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  • Verdier, Marianne
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    Abstract

    Interchange fees are interbank transfers that are used by payment platforms to allocate the total cost of a payment card transaction between the cardholder's bank (the Issuer) and the merchant's bank (the Acquirer). Each time a consumer pays by card, the Issuer of the card pays an interchange fee to the Acquirer of the transaction. In this paper, I study how banks' investments in payment card systems impact the privately and the socially optimal interchange fees. I show that if the Acquirer's contribution to investments is high, and if the consumers benefit more than the merchants from investments, the payment platform may decide to lower the interchange fee so as to encourage banks' investments in quality.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Journal of Industrial Organization.

    Volume (Year): 28 (2010)
    Issue (Month): 5 (September)
    Pages: 539-554

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    Handle: RePEc:eee:indorg:v:28:y:2010:i:5:p:539-554

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    Web page: http://www.elsevier.com/locate/inca/505551

    Related research

    Keywords: Payment card systems Interchange fees Two-sided markets Investments in quality;

    References

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    1. Gans Joshua S & King Stephen P, 2003. "The Neutrality of Interchange Fees in Payment Systems," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-18, January.
    2. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
    3. Baxter, William F, 1983. "Bank Interchange of Transactional Paper: Legal and Economic Perspectives," Journal of Law and Economics, University of Chicago Press, vol. 26(3), pages 541-88, October.
    4. Chakravorti Sujit & Roson Roberto, 2006. "Platform Competition in Two-Sided Markets: The Case of Payment Networks," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-25, March.
    5. Chakravorti Sujit, 2003. "Theory of Credit Card Networks: A Survey of the Literature," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-19, June.
    6. Richard Schmalensee, 2001. "Payment Systems and Interchange Fees," NBER Working Papers 8256, National Bureau of Economic Research, Inc.
    7. Rochet Jean-Charles, 2003. "The Theory of Interchange Fees: A Synthesis of Recent Contributions," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-28, June.
    8. Julian Wright, 2001. "The Determinants of Optimal Interchange Fees in Payment Systems," Industrial Organization 0108001, EconWPA.
    9. Graeme Guthrie & Julian Wright, 2003. "Competing Payment Schemes," Departmental Working Papers wp0311, National University of Singapore, Department of Economics.
    10. Jean-Charles Rochet & Jean Tirole, 2007. "Must-Take Cards and the Tourist Test," DNB Working Papers 127, Netherlands Central Bank, Research Department.
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