Locked out by loyalty: entry deterrence through rebates in payment card markets

Vera Lubbersen

Working Papers from DNB

Abstract: Payment card markets are globally dominated by a few large card networks, which give significant rebates to issuing banks. Policy makers are concerned about rising merchant fees and the overreliance on these networks’ payment services. A common assumption is that profitable entry is blockaded by the entry costs to set up the payment system and network, resulting in a monopolistic or duopolistic market structure. The question analyzed in this paper is under which conditions a card network sets rebates at a higher level such that competitors cannot profitably enter the market. Deterrence becomes more profitable for a large card network when transaction benefits increase - especially if issuing banks pass rebates through to cardholders. At the same time, entry becomes more blockaded if issuing banks face costs to switch their card issuance to a different card network - indicating that large card networks may use rebates to increase switching costs. These lock-in effects explain why domestic card networks are pushed aside and new card networks struggle to gain ground and may have important implications for payment regulation.

Keywords: Payment cards; Rebates; Entry deterrence; Interchange fee; Card networks (search for similar items in EconPapers)
JEL-codes: L12 L13 L14 L20 L21 (search for similar items in EconPapers)
Date: 2026-04
New Economics Papers: this item is included in nep-com, nep-ind and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:856

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