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Interchange fees and payment card networks: economics, industry developments, and policy issues

  • Robin A. Prager
  • Mark D. Manuszak
  • Elizabeth K. Kiser
  • Ron Borzekowski

In many countries around the world, electronic card-based payments have been replacing older types of payments at a rapid rate. In the United States, use of both debit cards and credit cards has been rising rapidly, while check volumes have been declining. The increased use of electronic payment methods has generated a number of public policy debates. One prominent debate concerns interchange fees. This paper is intended to provide background for understanding the interchange fee debate. The paper describes the operation of a typical payment card system, presents a summary of the economic theory underlying interchange fees, and discusses various developments in the U.S. payment cards industry, as well as legal and regulatory developments abroad. The paper concludes with a discussion and critical evaluation of a number of potential policy interventions.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2009-23.

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Date of creation: 2009
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Handle: RePEc:fip:fedgfe:2009-23
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  1. 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.
  2. Julian Wright, 2004. "The Determinants of Optimal Interchange Fees in Payment Systems," Journal of Industrial Economics, Wiley Blackwell, vol. 52(1), pages 1-26, 03.
  3. 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.
  4. Farrell Joseph, 2006. "Efficiency and Competition between Payment Instruments," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-19, March.
  5. Ann Kjos, 2007. "The merchant-acquiring side of the payment card industry; structure, operations, and challenges," Payment Cards Center Discussion Paper 07-12, Federal Reserve Bank of Philadelphia.
  6. Graeme Guthrie & Julian Wright, 2003. "Competing Payment Schemes," Departmental Working Papers wp0311, National University of Singapore, Department of Economics.
  7. James McAndrews & Zhu Wang, 2012. "The economics of two-sided payment card markets: pricing, adoption and usage," Working Paper 12-06, Federal Reserve Bank of Richmond.
  8. repec:reg:rpubli:105 is not listed on IDEAS
  9. Geoffrey R. Gerdes & Jack K. Walton II & 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.
  10. Zhu Wang, 2008. "Market structure and credit card pricing: what drives the interchange?," Payments System Research Working Paper PSR WP 06-04, Federal Reserve Bank of Kansas City.
  11. 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.
  12. Richard Schmalensee, 2001. "Payment Systems and Interchange Fees," NBER Working Papers 8256, National Bureau of Economic Research, Inc.
  13. 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.
  14. repec:rje:randje:v:37:y:2006:3:p:692-719 is not listed on IDEAS
  15. repec:fip:fedgws:y:2008:i:oct:p:a75-a106:n:v.94 is not listed on IDEAS
  16. Geoffrey R. Gerdes, 2008. "Recent payment trends in the United States," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages A75-A106.
  17. 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, 09.
  18. Paul W. Bauer & Daniel Littman, 2007. "Are consumers cashing out?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Oct.
  19. Fumiko Hayashi & Stuart E. Wiener, 2006. "Interchange fees in Australia, the UK, and the United States : matching theory and practice," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 75-112.
  20. Fumiko Hayashi, 2004. "A puzzle of card payment pricing : why are merchants still accepting card payments?," Payments System Research Working Paper PSR WP 04-02, Federal Reserve Bank of Kansas City.
  21. Terri Bradford, 2008. "Developments in interchange fees in the United States and abroad," Payments System Research Briefing, Federal Reserve Bank of Kansas City, issue Apr.
  22. Gans Joshua S & King Stephen P, 2003. "The Neutrality of Interchange Fees in Payment Systems," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-18, January.
  23. Marc Rysman, 2006. "An Empirical Analysis of Payment Card Usage," Boston University - Department of Economics - Working Papers Series WP2006-002, Boston University - Department of Economics.
  24. repec:fip:fedgws:v.94:x:1 is not listed on IDEAS
  25. Elizabeth Klee, 2006. "Families' use of payment instruments during a decade of change in the U.S. payment system," Finance and Economics Discussion Series 2006-01, Board of Governors of the Federal Reserve System (U.S.).
  26. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
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