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Interchange fees in credit and debit card markets : what role for public authorities

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  • Barbara Pacheco
  • Richard J. Sullivan

Abstract

Credit and especially debit card transactions are on the rise worldwide. Interchange fees are an integral part of the pricing structure of credit and debit card transactions. Indirectly paid by merchants to card issuers, interchange fees in most countries are set by credit and debit card networks. But in one country, Australia, the central bank is regulating interchange fees, and in several other countries and areas, including the European Union, Mexico, the Netherlands, Spain, and the United Kingdom, public officials are taking, or considering taking, a more hands-on regulatory stance. In the United States, it is largely the court system that is debating interchange issues. ; The payments industry has a strong vested interest in interchange fees. They are a major portion of costs that merchants pay for processing debit and credit card payments and are a major source of revenue for banks that issue the cards. One reason for recent interest in interchange fees in the United States is a shift in retail payments away from checks. Research sponsored by the Federal Reserve documents a rise in electronic payments and a decline in the use of paper checks, with a milestone recently passed where the majority of noncash payments are now made using electronic instruments. This shift is also occurring in other countries. Since paper checks typically do not have an interchange fee while credit and debit payments do, the shift is a major reason why merchants face a rapidly rising cost of processing payments. Card issuers, on the other hand, rely on associated revenues to provide a return to their substantial investment in card payment networks. ; Pacheco and Sullivan summarize the proceedings of a conference sponsored by the Federal Reserve Bank of Kansas City, held in Santa Fe, New Mexico, in May 2005, which explored issues surrounding interchange fees. The conference brought together a distinguished group of industry participants, antitrust authorities, central bankers, and academics.

Suggested Citation

  • Barbara Pacheco & Richard J. Sullivan, 2006. "Interchange fees in credit and debit card markets : what role for public authorities," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 87-113.
  • Handle: RePEc:fip:fedker:y:2006:i:qi:p:87-113:n:v.91no.1
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    References listed on IDEAS

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    1. Geoffrey R. Gerdes & Jack K. Walton & May X. Liu & Darrel W. Parke, 2005. "Trends in the use of payment instruments in the United States," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Spr, pages 180-201.
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    Keywords

    Credit cards ; Debit cards ; Payment systems;

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