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Pricing of payment cards, competition, and efficiency: a possible guide for SEPA


  • Wilko Bolt


  • Heiko Schmiedel



This paper analyzes equilibrium pricing of payment cards and welfare consequences of payment card competition. In particular, we model competition between debit and credit cards. The paper argues that optimal consumer and merchant fees must take safety, income uncertainty, default risk, and the merchant’s handling cost of cash into account. Market segmentation where debit and credit cards serve different merchant segments yields a preferred “payment mix”. However, when markets are segmented, payment card fees do not necessarily reach their socially efficient levels. Hence, thoughtful regulatory intervention regarding merchant fees may still be necessary to raise total surplus. Copyright Springer-Verlag 2013

Suggested Citation

  • Wilko Bolt & Heiko Schmiedel, 2013. "Pricing of payment cards, competition, and efficiency: a possible guide for SEPA," Annals of Finance, Springer, vol. 9(1), pages 5-25, February.
  • Handle: RePEc:kap:annfin:v:9:y:2013:i:1:p:5-25
    DOI: 10.1007/s10436-011-0177-7

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    References listed on IDEAS

    1. Benjamin E. Hermalin & Michael L. Katz, 2006. "Your network or mine? The economics of routing rules," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 692-719, September.
    2. Fernando Alvarez & Francesco Lippi, 2009. "Financial Innovation and the Transactions Demand for Cash," Econometrica, Econometric Society, vol. 77(2), pages 363-402, March.
    3. Falko Fecht & Antoine Martin, 2009. "Banks, markets, and efficiency," Annals of Finance, Springer, vol. 5(2), pages 131-160, March.
    4. 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.
    5. repec:rje:randje:v:37:y:2006:3:p:692-719 is not listed on IDEAS
    6. Chakravorti Sujit & Roson Roberto, 2006. "Platform Competition in Two-Sided Markets: The Case of Payment Networks," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-25, March.
    7. Schmalensee, Richard, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 103-122, June.
    8. 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.
    9. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
    10. 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.
    11. Wilko Bolt & Sujit Chakravorti, 2008. "Consumer Choice and Merchant Acceptance of Payment Media," DNB Working Papers 197, Netherlands Central Bank, Research Department.
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    Cited by:

    1. Bolt, Wilko & Humphrey, David, 2013. "Competition in bank-provided payment services," Working Paper Series 1539, European Central Bank.
    2. Ardizzi, Guerino, 2013. "Card versus cash: empirical evidence of the impact of payment card interchange fees on end users’ choice of payment methods," MPRA Paper 48088, University Library of Munich, Germany, revised 25 May 2013.

    More about this item


    Payment card competition; Equilibrium pricing; Economic efficiency; L11; G21; D53;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets


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