Approaches to regulating interchange fees in payment systems

Economic Record, 2003

2005

ECCRI RR14, 2014

Two-sided payment card markets generate costs that have to be distributed among the participating actors. For this purpose, payment card networks set an interchange fee, which is the fee paid by the merchant's bank to the cardholder's bank per transaction. While in recent years many antitrust authorities all over the world -including the European Commission -have opened proceedings against card brands in order to verify whether agreements to collectively establish the level of interchange fees are anticompetitive, the Reserve Bank of Australia -as a regulator -has directly tried to address market failures by lowering the level of interchange fees and changing some network rules. The US has followed with new legislation on financial consumer protection, which also intervenes on interchange fees. This has opened a strong debate not only on legitimacy of interchange fees, but also on the appropriateness of different public tools to address such issues. Drawing from economic and legal theories and a comparative analysis of recent case law in the EU and other jurisdictions, this work investigates whether a regulation rather than a purely competition policy approach would be more appropriate in this field, considering in particular, at EU level, all of the competition and regulatory concerns that have arisen from the operation of SEPA with multilateral interchange fees. The paper concludes that a wider regulation approach could address some of the shortcomings of a purely antitrust approach, proving to be highly beneficial to the development of an efficient European single payments area.

SSRN Electronic Journal, 2000

We analyze the impact of interchange fees on consumers'and merchants'incentives to adopt an innovative payment instrument, in a setting where there are adoption externalities between consumers and merchants. We show that consumer adoption decreases with the interchange fee for high degrees of externality, and varies nonmonotonically with it for low degrees of externality. The pro…t-maximizing interchange fee coincides with the social optimum when externalities are strong, whereas it is too high when they are weak. We also compare the issuers' incentives to innovate when they cooperate and when they make their innovation decisions independently.

SSRN Electronic Journal, 2000

The provision of retail payment services is complex with many participants engaging in a series of interrelated bilateral transactions and subject to large economies of scale and scope along with strong adoption, usage and network externalities. This makes sound public policy difficult. We focus on three types of market interventions for various countries. We argue that intervention into payment markets should concentrate on the removal of entry barriers in payment markets and providing greater incentives to adopt efficient payment instruments without stifling private sector investment in more efficient payment technologies over the long term. While the theoretical literature on the economics of payment cards is growing, the empirical literature is yet too limited to provide much guidance to public authorities. Eventually, the outcomes from different types of market interventions will provide a useful "natural experiment" to refute or validate the various theories of the economics of payments.

SSRN Electronic Journal, 2001

This paper presents a model of a card payment system to address the pricing and rules that govern such systems. It evaluates the social optimality of privately set interchange fees and the adoption of a rule by payment systems to prevent merchants surcharging for card transactions using two extremes of merchant pricing-monopolistic pricing and perfect competition. Both types of merchant pricing constrain the ability of card schemes to use interchange fees and the no-surcharge rule in anticompetitive ways, although for quite di erent reasons. The positive role of the no-surcharge rule in preventing excessive merchant surcharging is also highlighted.

The role played by merchants in their customers' choice of payment method is important in determining the extent to which payment card schemes face constraints in setting merchant service charges, which in the case of four-party payment card schemes then constrains their setting of interchange fees.

2002

Executive Summary This submission considers two aspects of the RBA's consultation document,“Reform of Credit Card Schemes in Australia.” First, we consider the theoretical basis for the documents draft recommendations. While in general the document clearly identifies the basic economic issues underlying credit card schemes and the setting of interchange fees, we believe that the document too readily dismisses the potential for interchange neutrality.

2008

This article surveys the recent theoretical literature on payment cards (focusing on debit and credit cards) and studies this research's possible implications for the current public policy debate over payment card networks and the pricing of their services for both consumers and merchants.