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A Model of the Card Payment System and the Interchange Fee

Author

Listed:
  • Paul De Grauwe
  • Laura Rinaldi

Abstract

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.

Suggested Citation

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

    as
    1. 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.
    2. Shy,Oz, 2001. "The Economics of Network Industries," Cambridge Books, Cambridge University Press, number 9780521800952.
    3. 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.
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    Cited by:

    1. Kemppainen, Kari, 2003. "Competition and regulation in European retail payment systems," Bank of Finland Research Discussion Papers 16/2003, Bank of Finland.
    2. 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.
    3. Kari Kemppainen, 2004. "Competition and regulation in European retail payment systems," Microeconomics 0404008, University Library of Munich, Germany.
    4. Kemppainen, Kari, 2003. "Competition and regulation in European retail payment systems," Research Discussion Papers 16/2003, Bank of Finland.

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