Payment Systems and Interchange Fees

Preprint
Publisher Website
Google Scholar
  • 1 January 2001
    • preprint
      • Published in RePEc
Abstract
In a typical bank credit card transaction, the merchant's bank pays an interchange fee, collectively determined by all participating banks, to the cardholder's bank. This paper shows how the interchange fee balances charges between cardholders and merchants under imperfect competition. The privately optimal fee depends mainly on differences between cardholders' and merchants' banks, not their collective market power. In a non-extreme case, the profit-maximizing interchange fee also maximizes total output and producers' plus consumers' surplus. There is no economic basis for favoring proprietary payment systems, which do not need interchange fees to balance charges, over the cooperative bank card systems.
All Related Versions

This publication has 0 references indexed in Scilit: