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Impact of interchange fees on a nonsaturated multi‐agent payment card market

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  • Biliana Alexandrova‐Kabadjova

Abstract

The impact that the level of interchange fees has on the payment adoption rate in a non‐saturated market is investigated. This study is performed under different degrees of consumers' and merchants' awareness of the benefits arriving from the network externalities. In a four‐party scheme, we model explicitly the interactions between consumers and merchants at the point of sale. The interchange fees flow from the acquirers to issuers. We allow card issuers to charge consumers with fixed fees and provide net benefits from card usage, whereas acquirers could charge fixed and transactional fees to the merchants. Merchant's transactional fees are determined proportionally to the level of interchange fees. We establish that, under this scheme, the two‐sided nature of the market leads to higher adoption rates with lower interchange fees. Copyright © 2009 John Wiley & Sons, Ltd.

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  • Biliana Alexandrova‐Kabadjova, 2009. "Impact of interchange fees on a nonsaturated multi‐agent payment card market," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 16(1‐2), pages 33-48, January.
    • Handle: RePEc:wly:isacfm:v:16:y:2009:i:1-2:p:33-48
    DOI: 10.1002/isaf.292
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    References listed on IDEAS

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    1. Schmalensee, Richard, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 103-122, June.
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    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 541-588, October.
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    5. Richard Schmalensee, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 103-122, June.
    6. Wright, Julian, 2003. "Pricing in debit and credit card schemes," Economics Letters, Elsevier, vol. 80(3), pages 305-309, September.
    7. David S. Evans & Richard Schmalensee, 2005. "The economics of interchange fees and their regulation : an overview," Proceedings – Payments System Research Conferences, Federal Reserve Bank of Kansas City, issue May, pages 73-120.
    8. Guillermo Ortiz, 2005. "Remarks on interchange fees : central bank perspectives and options," Proceedings – Payments System Research Conferences, Federal Reserve Bank of Kansas City, issue May, pages 289-307.
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