The Neutrality of Interchange Fees in Payment Systems

A BEJEAP Topics article. Abstract There has been considerable public debate over the effect of interchange fees on credit card transactions. Regulators in Australia and Europe have argued that these fees can be set by banks to have an anticompetitive effect. In the US, it has been argued that these...

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Bibliographic Details
Published in:The B.E. Journal of Economic Analysis & Policy 2003-01, Vol.3 (1), p.1
Main Authors: Gans, Joshua S, King, Stephen P
Format: Article
Language:English
Subjects:
Australia
Banks
Collusion
Competition
Costs
Credit
credit card associations
Credit card processing
Credit cards
Customers
Economic analysis
Economic policy
Economics
Europe
Fees & charges
interchange fee
Interchange rates
Joint ventures
Neutrality
no surcharge rule
Payment systems
Payments
Policy making
Prices
Profits
Studies
Surcharges
U.S.A
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Summary:A BEJEAP Topics article. Abstract There has been considerable public debate over the effect of interchange fees on credit card transactions. Regulators in Australia and Europe have argued that these fees can be set by banks to have an anticompetitive effect. In the US, it has been argued that these fees, together with a rule that prevents a surcharge for credit purchases, might create a cross subsidy between cash and credit customers. Academics have noted that, in particular circumstances, interchange fees have no real effects in the absence of such a no-surcharge rule. This paper demonstrates that the potential neutrality of interchange fees is a general result. We show that in the absence of a no surcharge rule or, alternatively, if there is perfect competition at the merchant level, interchange fees can be changed without leading to any real effects. This result does not depend on the degree or nature of competition at either the bank or the merchant level. We conclude that the elimination of no surcharge rules may provide practical policy solutions for authorities concerned about the level of interchange fees. Submitted: July 29, 2002 · Accepted: January 2, 2003 · Published: January 9, 2003 Originally published in Topics in Economic Analysis & Policy. Recommended Citation Gans, Joshua S. and King, Stephen P (2003) "The Neutrality of Interchange Fees in Payment Systems," Topics in Economic Analysis & Policy: Vol. 3 : Iss. 1, Article 1. Available at: http://www.bepress.com/bejeap/topics/vol3/iss1/art1
ISSN:1935-1682
1538-0653
1935-1682
1538-0653
DOI:10.2202/1538-0653.1069