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Interchange fees and payment card networks: economics, industry developments, and policy issues

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Author Info

  • Robin A. Prager
  • Mark D. Manuszak
  • Elizabeth K. Kiser
  • Ron Borzekowski

Abstract

In many countries around the world, electronic card-based payments have been replacing older types of payments at a rapid rate. In the United States, use of both debit cards and credit cards has been rising rapidly, while check volumes have been declining. The increased use of electronic payment methods has generated a number of public policy debates. One prominent debate concerns interchange fees. This paper is intended to provide background for understanding the interchange fee debate. The paper describes the operation of a typical payment card system, presents a summary of the economic theory underlying interchange fees, and discusses various developments in the U.S. payment cards industry, as well as legal and regulatory developments abroad. The paper concludes with a discussion and critical evaluation of a number of potential policy interventions.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2009-23.

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Date of creation: 2009
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Handle: RePEc:fip:fedgfe:2009-23

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Related research

Keywords: Electronic funds transfers ; Interchange fees (Banking) ; Credit cards;

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References

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  1. Fumiko Hayashi, 2004. "A puzzle of card payment pricing : why are merchants still accepting card payments?," Payments System Research Working Paper PSR WP 04-02, Federal Reserve Bank of Kansas City.
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  6. Graeme Guthrie & Julian Wright, 2003. "Competing Payment Schemes," Departmental Working Papers wp0311, National University of Singapore, Department of Economics.
  7. James McAndrews & Zhu Wang, 2012. "The economics of two-sided payment card markets: pricing, adoption and usage," Working Paper 12-06, Federal Reserve Bank of Richmond.
  8. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
  9. repec:rje:randje:v:37:y:2006:3:p:692-719 is not listed on IDEAS
  10. Geoffrey R. Gerdes & Jack K. Walton II & May X. Liu & Darrel W. Parke, 2005. "Trends in the use of payment instruments in the United States," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Spr, pages 180-201.
  11. 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.
  12. Zhu Wang, 2008. "Market structure and credit card pricing: what drives the interchange?," Payments System Research Working Paper PSR WP 06-04, Federal Reserve Bank of Kansas City.
  13. 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.
  14. Ann Kjos, 2007. "The merchant-acquiring side of the payment card industry; structure, operations, and challenges," Payment Cards Center Discussion Paper 07-12, Federal Reserve Bank of Philadelphia.
  15. Schmalensee, Richard, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 103-22, June.
  16. Paul W. Bauer & Daniel Littman, 2007. "Are consumers cashing out?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Oct.
  17. Marc Rysman, 2006. "An Empirical Analysis of Payment Card Usage," Boston University - Department of Economics - Working Papers Series WP2006-002, Boston University - Department of Economics.
  18. Terri Bradford, 2008. "Developments in interchange fees in the United States and abroad," Payments System Research Briefing, Federal Reserve Bank of Kansas City, issue Apr.
  19. Fumiko Hayashi & Stuart E. Wiener, 2006. "Interchange fees in Australia, the UK, and the United States : matching theory and practice," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 75-112.
  20. Sujit Chakravorti & Roberto Roson, 2004. "Platform competition in two-sided markets: the case of payment networks," Working Paper Series WP-04-09, Federal Reserve Bank of Chicago.
  21. Benjamin E. Hermalin & Michael L. Katz, 2006. "Your network or mine? The economics of routing rules," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 692-719, 09.
  22. Geoffrey R. Gerdes, 2008. "Recent payment trends in the United States," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages A75-A106.
  23. 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.
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  25. Julian Wright, 2001. "The Determinants of Optimal Interchange Fees in Payment Systems," Industrial Organization 0108001, EconWPA.
  26. 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.
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Citations

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Cited by:
  1. James McAndrews & Zhu Wang, 2012. "The economics of two-sided payment card markets: pricing, adoption and usage," Working Paper 12-06, Federal Reserve Bank of Richmond.
  2. Fumiko Hayashi, 2013. "The new debit card regulations: effects on merchants, consumers, and payments system efficiency," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 89-118.
  3. Scott Schuh & Oz Shy & Joanna Stavins & Robert Triest, 2011. "An economic analysis of the 2010 proposed settlement between the Department of Justice and credit card networks," Public Policy Discussion Paper 11-4, Federal Reserve Bank of Boston.
  4. Arango, Carlos & Huynh, Kim P. & Sabetti, Leonard, 2011. "How do you pay? The role of incentives at the point-of-sale," Working Paper Series 1386, European Central Bank.
  5. Zhu Wang, 2013. "Demand externalitites and price cap regulation: Learning from a two-sided market," Working Paper 13-06, Federal Reserve Bank of Richmond.
  6. Pidong Huang & Young Sik Kim & Manjong Lee, 2014. "Optimal Allocation of Social Cost for Electronic Payment System: A Ramsey Approach," Discussion Paper Series 1402, Institute of Economic Research, Korea University.
  7. Zhu Wang, 2012. "Debit card interchange fee regulation: some assessments and considerations," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 159-182.
  8. Börestam, Ann & Schmiedel, Heiko, 2011. "Interchange fees in card payments," Occasional Paper Series 131, European Central Bank.
  9. Wilko Bolt & Sujit Chakravorti, 2010. "Digitization of Retail Payment," DNB Working Papers 270, Netherlands Central Bank, Research Department.
  10. Sullivan, Richard J., 2013. "The impact of debit card regulation on checking account fees," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 59-93.

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