Why do card issuers charge proportional fees?
This paper explains why payment card companies charge consumers and merchants fees which are proportional to the transaction values instead of charging a fixed per-transaction fee. Our theory shows that, even in the absence of any cost considerations, card companies earn much higher profit when they charge proportional fees. It is also shown that competition among merchants reduces card companies' gains from using proportional fees relative to a fixed per-transaction fee. Merchants are found to be the losers from proportional fees whereas consumer and social welfare are invariant with respect to the two types of fees. ; Also issued as a Payments System Research Working Paper.
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| Length: | |
| Date of creation: | 2008 |
| Date of revision: | |
| Handle: | RePEc:fip:fedkrw:rwp08-13 |
| Contact details of provider: | Postal: Phone: (816) 881-2254 Web page: http://www.kansascityfed.org/ More information through EDIRC
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References listed on IDEAS
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- 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.
- James McAndrews & Zhu Wang, 2008. "The economics of two-sided payment card markets: pricing, adoption and usage," Research Working Paper RWP 08-12, Federal Reserve Bank of Kansas City.
- Schwartz Marius & Vincent Daniel R., 2006. "The No Surcharge Rule and Card User Rebates: Vertical Control by a Payment Network," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-31, March.
- 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.
- 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.
- 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.
- 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.
- Fumiko Hayashi & Zhu Wang, 2009. "Product innovation and network survival in the U.S. ATM and debit card network industry," Research Working Paper RWP 08-14, Federal Reserve Bank of Kansas City.
- Julian Wright, 2001.
"The Determinants of Optimal Interchange Fees in Payment Systems,"
Industrial Organization
0108001, EconWPA.
- 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.
- 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.
- Rochet Jean-Charles & Tirole Jean, 2003. "An Economic Analysis of the Determination of Interchange Fees in Payment Card Systems," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-11, June.
- Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
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