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Interchange fees and inefficiencies in the substitution between debit cards and cash

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  • Verdier, Marianne
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    Abstract

    This article examines the divergence between the profit maximizing and the welfare maximizing interchange fees when two issuing banks, which compete for deposits, share a debit card platform and their ATM networks. It suggests some guidelines for regulatory intervention to reduce inefficiencies in the substitution between debit cards and cash. For instance, when banks make profit on ATM transactions, if the volume of foreign withdrawals is high and if the opportunity cost of being paid in cash for merchants who accept cards is low, social welfare can be increased by reducing the interchange fee on withdrawals. If the value of the expenses paid by card is high, and if merchant demand is not very sensitive to the interchange fee on card payments, social welfare can be increased by reducing the interchange fee on card payments.

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    Bibliographic Info

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

    Volume (Year): 30 (2012)
    Issue (Month): 6 ()
    Pages: 682-696

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    Handle: RePEc:eee:indorg:v:30:y:2012:i:6:p:682-696

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

    Related research

    Keywords: Payment card systems; Interchange fees; Two-sided markets; Money demand; ATMs;

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    References

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    1. Marianne Verdier, 2011. "Interchange Fees In Payment Card Systems: A Survey Of The Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 25(2), pages 273-297, 04.
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    20. Ron Borzekowski & K. Kiser Elizabeth & Ahmed Shaista, 2008. "Consumers' Use of Debit Cards: Patterns, Preferences, and Price Response," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(1), pages 149-172, 02.
    21. Chang Howard & Evans David S. & Garcia Swartz Daniel D., 2005. "The Effect of Regulatory Intervention in Two-Sided Markets: An Assessment of Interchange-Fee Capping in Australia," Review of Network Economics, De Gruyter, vol. 4(4), pages 1-31, December.
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    Cited by:
    1. Kopsakangas-Savolainen, Maria & Takalo, Tuomas, 2012. "Competition before sunset: The case of the Finnish ATM market," Research Discussion Papers 32/2012, Bank of Finland.

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