Approaches to Regulating Interchange Fees in Payment Systems

Joshua Gans and Stephen King

Review of Network Economics, 2003, vol. 2, issue 2, 21

Abstract: Significant attention worldwide has been paid to the regulation of credit card interchange fees. In part, this attention has followed concerns expressed about the level of these fees in Europe, the U.S. and Australia. The Reserve Bank of Australia recently conducted an extensive inquiry into the interchange fees associated with credit cards and has moved to regulate those fees. At the same time, research economists have considered determinants of the socially optimal interchange fee. In this paper, we use the Australian experience to highlight alternative methods of regulating interchange fees in payments systems. We use a simple model to derive a socially optimal interchange fee when merchants cannot freely set different prices for different payment instruments. We compare the socially optimal interchange fee from this model with those presented in the economics literature and show that most analyses capture a simple externality within the optimal fee. Credit card usage for a specific transaction is determined by the customer. But the customer does not bear the costs or receive the benefits that card usage imposes on the merchant. The optimal interchange fee internalises this externality. We then compare the theoretical optimal interchange fee with the approaches proposed in Australia, and show that the regulatory approach adopted by the Reserve Bank of Australia may be viewed as economically conservative in certain situations. Finally, we consider additional issues that will impinge on the regulation of interchange fees.

Date: 2003
References: Add references at CitEc
Citations: View citations in EconPapers (17)

Downloads: (external link)
https://doi.org/10.2202/1446-9022.1022 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:rneart:v:2:y:2003:i:2:n:5

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/rne/html

DOI: 10.2202/1446-9022.1022

Access Statistics for this article

Review of Network Economics is currently edited by Lukasz Grzybowski

More articles in Review of Network Economics from De Gruyter
Bibliographic data for series maintained by Peter Golla ().