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Private cards and the bypass of payment systems by merchants

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  • Bourreau, Marc
  • Verdier, Marianne

Abstract

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.

Suggested Citation

  • Bourreau, Marc & Verdier, Marianne, 2010. "Private cards and the bypass of payment systems by merchants," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1798-1807, August.
  • Handle: RePEc:eee:jbfina:v:34:y:2010:i:8:p:1798-1807
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    References listed on IDEAS

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    1. Graeme Guthrie & Julian Wright, 2003. "Competing Payment Schemes," Departmental Working Papers wp0311, National University of Singapore, Department of Economics.
    2. Zinman, Jonathan, 2009. "Debit or credit?," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 358-366, February.
    3. Bolt, Wilko & Jonker, Nicole & van Renselaar, Corry, 2010. "Incentives at the counter: An empirical analysis of surcharging card payments and payment behaviour in the Netherlands," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1738-1744, August.
    4. 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.
    5. Chakravorti Sujit, 2003. "Theory of Credit Card Networks: A Survey of the Literature," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-19, June.
    6. Jean-Charles Rochet & Jean Tirole, 2014. "Platform Competition in Two-Sided Markets," CPI Journal, Competition Policy International, vol. 10.
    7. Beijnen, Christine & Bolt, Wilko, 2009. "Size matters: Economies of scale in European payments processing," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 203-210, February.
    8. 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.
    9. Jean‐Charles Rochet & Jean Tirole, 2011. "Must‐Take Cards: Merchant Discounts And Avoided Costs," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 462-495, June.
    10. Scholnick, Barry & Massoud, Nadia & Saunders, Anthony & Carbo-Valverde, Santiago & Rodríguez-Fernández, Francisco, 2008. "The economics of credit cards, debit cards and ATMs: A survey and some new evidence," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1468-1483, August.
    11. Julian Wright, 2004. "The Determinants of Optimal Interchange Fees in Payment Systems," Journal of Industrial Economics, Wiley Blackwell, vol. 52(1), pages 1-26, March.
    12. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
    13. 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.
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    Cited by:

    1. Humphrey, David B., 2010. "Retail payments: New contributions, empirical results, and unanswered questions," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1729-1737, August.
    2. Wismer, Sebastian, 2013. "Intermediated vs. Direct Sales and a No-Discrimination Rule," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79999, Verein für Socialpolitik / German Economic Association.
    3. Pierpaolo Iannozzi, 2013. "Strumenti di pagamento come leva di valorizzazione delle reti: l’esperienza delle fuel cards," ECONOMIA E DIRITTO DEL TERZIARIO, FrancoAngeli Editore, vol. 2013(3), pages 393-420.
    4. Wilko Bolt & Sujit Chakravorti, 2010. "Digitization of Retail Payment," DNB Working Papers 270, Netherlands Central Bank, Research Department.

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