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The economics of payment card fee structure: what drives payment card rewards?

  • Fumiko Hayashi

This paper investigates potential market forces that cause payment card rewards even when providing payment card rewards is not the most efficient. Three factors-oligopolistic merchants, output-maximizing card networks, and the merchant's inability to set different prices across payment methods-may potentially explain the prevalence of payment card rewards programs in the United States today. The paper also points out that competition among card networks may potentially make payment rewards too generous, and thus deteriorate social welfare and its distribution. The situation may potentially warrant public policy interventions. ; Also issued as a Payments System Research Working Paper.

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File URL: http://www.kansascityfed.org/PUBLICAT/RESWKPAP/PDF/RWP08-07.pdf
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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 08-07.

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Date of creation: 2008
Date of revision:
Handle: RePEc:fip:fedkrw:rwp08-07
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  1. 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.
  2. Schmalensee, Richard, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 103-22, June.
  3. Garcia-Swartz Daniel D. & Hahn Robert W. & Layne-Farrar Anne, 2006. "The Move Toward a Cashless Society: Calculating the Costs and Benefits," Review of Network Economics, De Gruyter, vol. 5(2), pages 1-30, June.
  4. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  5. Graeme Guthrie & Julian Wright, 2003. "Competing Payment Schemes," Departmental Working Papers wp0311, National University of Singapore, Department of Economics.
  6. Jean-Charles Rochet & Jean Tirole, 2003. "Platform Competition in Two-Sided Markets," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 990-1029, 06.
  7. Fumiko Hayashi, 2008. "The economics of payment card fee structure: what is the optimal balance between merchant fee and payment card rewards?," Research Working Paper RWP 08-06, Federal Reserve Bank of Kansas City.
  8. James McAndrews & Zhu Wang, 2007. "Microfoundations of Two-sided Markets: The Payment Card Example," DNB Working Papers 128, Netherlands Central Bank, Research Department.
  9. Garcia-Swartz Daniel D. & Hahn Robert W. & Layne-Farrar Anne, 2006. "The Move Toward a Cashless Society: A Closer Look at Payment Instrument Economics," Review of Network Economics, De Gruyter, vol. 5(2), pages 1-24, June.
  10. repec:rje:randje:v:37:y:2006:3:p:668-691 is not listed on IDEAS
  11. 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.
  12. Hayashi Fumiko, 2006. "A Puzzle of Card Payment Pricing: Why Are Merchants Still Accepting Card Payments?," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-31, March.
  13. 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.
  14. Fumiko Hayashi, 2006. "Pricing and welfare implications of payment card network competition," Payments System Research Working Paper PSR WP 06-03, Federal Reserve Bank of Kansas City.
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