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SEPA, efficiency, and payment card competition

  • Bolt, Wilko
  • Schmiedel, Heiko

This paper analyzes the welfare implications of creating a Single Euro Payments Area. We study the effects of increased network compatibility and payment scale economies on consumer and merchant card fees and its impact on card usage. In particular, we model competition among debit cards and between debit and credit cards. We show that competitive pressures dampen merchant fees and increase total card acceptance. The paper argues that there is room for multilateral interchange fee arrangements to achieve optimal consumer and merchant fees, taking safety, income uncertainty, default risk, merchant's pricing power, and the avoided cost of cash at the retailers side into account. Consumers and merchants are likely to benefit the most from the creation of SEPA when sufficient payment card competition alleviates potential monopolistic tendencies. JEL Classification: L11, G21, D53

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File URL: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1140.pdf
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Paper provided by European Central Bank in its series Working Paper Series with number 1140.

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Date of creation: Dec 2009
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Handle: RePEc:ecb:ecbwps:20091140
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  1. Wilko Bolt & Sujit Chakravorti, 2008. "Consumer choice and merchant acceptance of payment media," Working Paper Series WP-08-11, Federal Reserve Bank of Chicago.
  2. Heiko Schmiedel, 2007. "The economic impact of the Single Euro Payments Area," Occasional Paper Series 71, European Central Bank.
  3. Christine Beijnen & Wilko Bolt, 2008. "Size Matters: Economies of Scale in European Payment Processing," FIW Working Paper series 013, FIW.
  4. Mark Armstrong, 2005. "Competition in Two-Sided Markets," Industrial Organization 0505009, EconWPA.
  5. Kemppainen, Kari, 2008. "Integrating European retail payment systems: some economics of SEPA," Research Discussion Papers 22/2008, Bank of Finland.
  6. 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 541-88, October.
  7. Fernando Alvarez & Francesco Lippi, 2007. "Financial Innovation and the Transactions Demand for Cash," EIEF Working Papers Series 0807, Einaudi Institute for Economics and Finance (EIEF), revised Sep 2007.
  8. Schmalensee, Richard, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 103-22, June.
  9. Özlem Bedre-Defolie & Emilio Calvano, 2010. "Pricing payment cards," ESMT Research Working Papers ESMT-10-005, ESMT European School of Management and Technology.
  10. Julian Wright, 2001. "The Determinants of Optimal Interchange Fees in Payment Systems," Industrial Organization 0108001, EconWPA.
  11. Chakravorti, Sujit & To, Ted, 2007. "A theory of credit cards," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 583-595, June.
  12. W. Bolt, 2003. "Retail Payments in the Netherlands: some Facts and Some Theory," WO Research Memoranda (discontinued) 722, Netherlands Central Bank, Research Department.
  13. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  14. Graeme Guthrie & Julian Wright, 2003. "Competing Payment Schemes," Departmental Working Papers wp0311, National University of Singapore, Department of Economics.
  15. Guido K. Schaefer, 2008. "An Economic Analysis of the Single Euro Payments Area (SEPA)," FIW Working Paper series 011, FIW.
  16. Iftekhar Hasan & Heiko Schmiedel & Liang Song, 2012. "Returns to Retail Banking and Payments," Journal of Financial Services Research, Springer, vol. 41(3), pages 163-195, June.
  17. Wilko Bolt & David Humphrey, 2007. "Payment network scale economies, SEPA, and cash replacement," Working Papers 07-32, Federal Reserve Bank of Philadelphia.
  18. James McAndrews & Zhu Wang, 2007. "Microfoundations of Two-sided Markets: The Payment Card Example," DNB Working Papers 128, Netherlands Central Bank, Research Department.
  19. Wilko Bolt & Sujit Chakravorti, 2008. "Economics of payment cards: a status report," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 15-27.
  20. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
  21. Sujit Chakravorti & Roberto Roson, 2004. "Platform competition in two-sided markets: the case of payment networks," Working Paper Series WP-04-09, Federal Reserve Bank of Chicago.
  22. Gene Amromin & Sujit Chakravorti, 2009. "Whither Loose Change? The Diminishing Demand for Small-Denomination Currency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 315-335, 03.
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