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

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  • Verdier, Marianne

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.

Suggested Citation

  • Verdier, Marianne, 2012. "Interchange fees and inefficiencies in the substitution between debit cards and cash," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 682-696.
  • Handle: RePEc:eee:indorg:v:30:y:2012:i:6:p:682-696
    DOI: 10.1016/j.ijindorg.2012.08.006
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    References listed on IDEAS

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    Cited by:

    1. Kopsakangas-Savolainen Maria & Takalo Tuomas, 2014. "Competition Before Sunset: The Case of the Finnish ATM Market," Review of Network Economics, De Gruyter, vol. 13(1), pages 1-33, March.

    More about this item

    Keywords

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

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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