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Private cards and the bypass of payment systems by merchants

  • Bourreau, Marc
  • Verdier, Marianne

This paper studies the incentives of a merchant to bypass a payment platform by issuing private cards. In our model, a payment platform allocates the total cost of a card transaction between a monopolistic issuer and a monopolistic acquirer by choosing an "interchange fee". We determine how the level of the interchange fee impacts a merchant's decision to issue private cards, if there are strategic interactions between merchants. We prove that the payment platform can only deter entry by lowering the level of the interchange fee. If the payment platform chooses to accommodate entry, we find that the total user surplus increases, but that entry is beneficial to social welfare only if the entry cost is sufficiently low.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 34 (2010)
Issue (Month): 8 (August)
Pages: 1798-1807

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Handle: RePEc:eee:jbfina:v:34:y:2010:i:8:p:1798-1807
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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  1. Rochet, Jean-Charles & Tirole, Jean, 2003. "Platform Competition in Two-Sided Markets," IDEI Working Papers 152, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Zinman, Jonathan, 2009. "Debit or credit?," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 358-366, February.
  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 541-88, October.
  4. Carbó Valverde Santiago & Massoud Nadia & Rodríguez-Fernández Francisco & Saunders Anthony & Scholnick Barry, 2007. "The Economics of Credit Cards, Debit Cards and ATMs: A Survey and Some New Evidence," Working Papers 201074, Fundacion BBVA / BBVA Foundation.
  5. Rochet, Jean-Charles & Tirole, Jean, 2008. "Must-Take Cards: Merchant Discounts and Avoided Costs," IDEI Working Papers 496, Institut d'Économie Industrielle (IDEI), Toulouse.
  6. Christine Beijnen & Wilko Bolt, 2008. "Size Matters: Economies of Scale in European Payment Processing," FIW Working Paper series 013, FIW.
  7. Wilko Bolt & Nicole Jonker & Corry van Renselaar, 2008. "Incentives at the counter: An empirical analysis of surcharging card payment and payment behaviour in the Netherlands," DNB Working Papers 196, Netherlands Central Bank, Research Department.
  8. Sujit Chakravorti, 2003. "Theory of credit card networks: a survey of the literature," Payment Cards Center Discussion Paper 03-09, Federal Reserve Bank of Philadelphia.
  9. Julian Wright, 2001. "The Determinants of Optimal Interchange Fees in Payment Systems," Industrial Organization 0108001, EconWPA.
  10. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  11. Graeme Guthrie & Julian Wright, 2003. "Competing Payment Schemes," Departmental Working Papers wp0311, National University of Singapore, Department of Economics.
  12. Rochet Jean-Charles, 2003. "The Theory of Interchange Fees: A Synthesis of Recent Contributions," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-28, June.
  13. 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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