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The Determinants of Optimal Interchange Fees in Payment Systems

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Author Info
Julian Wright (The University of Auckland)

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Abstract

A fundamental aspect of any open payment system is the interchange fee that is paid from the merchant's bank to the cardholder's bank. Using a model in which there is partial participation by heterogeneous consumers and merchants, this paper characterizes the output maximizing, profit maximizing and welfare maximizing level of such an interchange fee. It examines how the optimal level of the fee depends on costs, profits margins, pass-through coefficients, participation rates, and membership fees, as well as two different strategic effects arising from competition between merchants. It also determines the factors which drive deviations between the output maximizing, profit maximizing, and welfare maximizing interchange fees.

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Publisher Info
Paper provided by EconWPA in its series Industrial Organization with number 0108001.

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Length: 46 pages
Date of creation: 16 Aug 2001
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Handle: RePEc:wpa:wuwpio:0108001

Note: Type of Document - ; pages: 46 . Department of Economics Working Paper No. 220 University of Auckland July 19, 2001
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Related research
Keywords: payment networks debit credit cards interchange;

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Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs
L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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  1. repec:bep:eaptop:v:3:y:2003:i:1:p:1069-1069 is not listed on IDEAS
  2. Jean-Jacques Laffont & Jean Tirole, 2001. "Competition in Telecommunications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262621509.
  3. Armstrong, Mark, 2001. "The theory of access pricing and interconnection," MPRA Paper 15608, University Library of Munich, Germany. [Downloadable!]
  4. Sujit Chakravorti & William R. Emmons, 2001. "Who pays for credit cards?," Occasional Paper; Emerging Payments EPS-2001-1, Federal Reserve Bank of Chicago. [Downloadable!]
  5. Wright, Julian, 2002. "Access Pricing under Competition: An Application to Cellular Networks," Journal of Industrial Economics, Blackwell Publishing, vol. 50(3), pages 289-315, September. [Downloadable!] (restricted)
  6. Rochet, Jean Charles & Tirole, Jean, 1999. "Cooperation Among Competitors: The Economics of Credit Card Associations," CEPR Discussion Papers 2101, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Richard Schmalensee, 2001. "Payment Systems and Interchange Fees," NBER Working Papers 8256, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  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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