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Interchange fees in Australia, the UK, and the United States : matching theory and practice

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  • Fumiko Hayashi
  • Stuart E. Weiner

Abstract

Interchange fees are an integral part of the pricing structure of credit and debit card industries. While in recent years the theoretical literature on interchange fees, and payment cards in general, has grown rapidly, the empirical literature has not. There are several reasons for this. First, comprehensive data are hard to obtain. Second, the industries are very complicated, and empirical models need to incorporate many industry-specific features, such as payment-card network rules and government regulations. And third, empirical studies may require a generalized empirical model since, typically, only a few payment card networks exist in a given country. However, because of the first and second reasons, generalizing empirical models may prove problematic. ; Hayashi and Weiner seek to provide a bridge between the theoretical and empirical literatures on interchange fees. Specifically, they confront theory with practice by asking, to what extent do existing models of interchange fees match up with actual interchange fee practices in various countries? For each of three key countries—Australia, the United Kingdom, and the United States—models that “best” fit the competitive and institutional features of that country’s payment card market are identified, and the implications of those models are compared to actual practices. Along what competitive dimensions is there alignment? Along what competitive dimensions is there not alignment? What country-specific factors appear to be important in explaining deviations from theoretical predictions? The results suggest that a theory applicable in one country may not be applicable in another and that similar interchange fee arrangements and regulations may well have different implications in different countries.

Suggested Citation

  • Fumiko Hayashi & Stuart E. Weiner, 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.
  • Handle: RePEc:fip:fedker:y:2006:i:qiii:p:75-112:n:v.91no.3
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    References listed on IDEAS

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    1. Hayashi Fumiko, 2006. "A Puzzle of Card Payment Pricing: Why Are Merchants Still Accepting Card Payments?," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-31, March.
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    Citations

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    Cited by:

    1. 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.
    2. 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.
    3. Oz Shy & Zhu Wang, 2008. "Why do card issuers charge proportional fees?," Research Working Paper RWP 08-13, Federal Reserve Bank of Kansas City.
    4. Fumiko Hayashi, 2008. "The economics of payment card fee structure: what is the optimal balance between merchant fee and payment card rewards?," Research Working Paper RWP 08-06, Federal Reserve Bank of Kansas City.
    5. Fumiko Hayashi, 2006. "Pricing and welfare implications of payment card network competition," Payments System Research Working Paper PSR WP 06-03, Federal Reserve Bank of Kansas City.
    6. Robin A. Prager & Mark D. Manuszak & Elizabeth K. Kiser & Ron Borzekowski, 2009. "Interchange fees and payment card networks: economics, industry developments, and policy issues," Finance and Economics Discussion Series 2009-23, Board of Governors of the Federal Reserve System (U.S.).
    7. Arango, Carlos & Huynh, Kim P. & Sabetti, Leonard, 2015. "Consumer payment choice: Merchant card acceptance versus pricing incentives," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 130-141.

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    Keywords

    Credit cards ; Debit cards;

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