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A Model of the Card Payment System and the Interchange Fee


  • Paul De Grauwe
  • Laura Rinaldi


We analyse a card payment system to assess the economic impact of the interchange fee. This fee is paid by the bank of the merchant, the acquirer, to the bank of the consumer, the issuer. We build up a mode in order to explore whether the interchange fee can enhance the participation to the system and thus increase the benefits of the system as a whole. We also investigate what kind of incentives the interchange fee provides to the actors of the system. We show that the interchange fee selected by the card associations differs from the one that would be selected by a welfare maximising social planner. Moreover the interchange fee selected by the market is likely to produce a smaller market for cards than the socially optimal one.

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  • Paul De Grauwe & Laura Rinaldi, 2002. "A Model of the Card Payment System and the Interchange Fee," CESifo Working Paper Series 796, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_796

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    References listed on IDEAS

    1. Bouckaert, Jan & Degryse, Hans, 2000. "Price competition between an expert and a non-expert," International Journal of Industrial Organization, Elsevier, vol. 18(6), pages 901-923, August.
    2. 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.
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    Cited by:

    1. David S. Evans & Richard Schmalensee, 2005. "The economics of interchange fees and their regulation : an overview," Proceedings – Payments System Research Conferences, Federal Reserve Bank of Kansas City, issue May, pages 73-120.
    2. Kari Kemppainen, 2004. "Competition and regulation in European retail payment systems," Microeconomics 0404008, EconWPA.
    3. Kemppainen, Kari, 2003. "Competition and regulation in European retail payment systems," Research Discussion Papers 16/2003, Bank of Finland.

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