The Role and Regulation of Interchange Fees in European Payment Cards
Bruxelles, June 15 2011
The economics of card payments
Alberto Heimler
Professor of economics
SSPA Roma
Payment cards: some market features
• Two sided market: card holders and retailers.
• BUT now cards are an integral part of the banking relationship
and all retailers have a POS connection. Network externality is
no longer an issue, at least for established cards. Usage
externality is not a justification either.
Rules
• No price discrimination
• No steering rule
The market for payment instrument: what is the
price and the cost of alternatives
• Cash NO COMPETITION zero price (but its is a costly service)
The supply of money is free for all users (seignorage costs paid by tax payer;
banking costs paid by bank service users). Transaction costs paid by consumers
and merchants.
• Checks NO COMPETITION zero price (but it is a costly service)
Issuers pay a fixed price per transaction. Beneficiary pays by a delay in
accreditation
• Bank transfers LITTLE COMPETITION (between deposit holding banks)
Debtor pays a price set by its bank, Beneficiary pays by a delay in accreditation
• Direct debit COMPETITION ON ACQUIRING
Debtor pays a fixed price per transaction, creditor pays acquirer fees, Interchange
fee is zero (SEPA)
• Debit card COMPETITION ON ACQUIRING
Holder pays at most a fixed yearly fee, merchants pay merchant fees, issuer bank
gets interchange fee
• Credit card COMPETITION AMONG ISSUERS AND ACQUIRERS
Holder pays at most a fixed yearly fee, merchants pay merchant fee, issuer bank
gets interchange fee. Expenses cleared once a month
Usage externality and the interchange fee
Acquirer benefits
0.0
0.0
Less acquirer costs
0.5
0.5
Plus transfer
0.0
0.5
Acquirer surplus
-0.5
0.0
Issuer benefits
0.0
0.0
Less issuer costs
0.5
0.5
Plus transfer
0.0
0.5
Issuer surplus
-0.5
0.0
Consumer benefits
0.5
0.5
Less consumer costs
0.75
0.75
Plus transfer
0.0
0.5
Consumer surplus
.0.25
0.25
Merchant benefits
2.25
2.25
Merchant costs
0.25
0.25
Less transfer
0.0
1.50
Merchant surplus
2.0
0.50
Elimination of the non discrimination rule and of
the interchange fee
• Merchants would decide the discount or the overcharge
associated with the different payment instruments
• Competition between credit cards would increase and not
for interest payments but also for the cost of using the card
• Banks would charge for the supply of the different
payment systems.
• Consumers would choose among the different payment
systems according to their costs
Usage externality and each party pays its own dues
Acquirer benefits
0.0
0.0
Less acquirer costs
0.5
0.5
Plus transfer
0.0
0.5
Acquirer surplus
-0.5
0.0
Issuer benefits
0.0
0.0
Less issuer costs
0.5
0.5
Plus transfer
0.0
0.5
Issuer surplus
-0.5
0.0
Consumer benefits
0.5
0.5
Less consumer costs
0.75
1.25 (includes the 0.5 to issuers)
Plus transfer
0.0
1.0
Consumer surplus
.0.25
0.25
Merchant benefits
2.25
2.25
Merchant costs
0.25
0.25
Less transfer
0.0
1.50
Merchant surplus
2.0
0.50
The interchange fee and payment cards
• The interchange fee rebalances the turnover between the two
sides of the market.
• Consumers have only one debit card. No multihoming in debit.
So there is no elimination of extraprofits by issuers
• In credit multi-homing but which card to use depends on the
rewards consumers get or on the interest cards issuers charge.
The cost to merchants does not enter consumer decision making
• In any case the cost of the card transaction does not depend on its
size. So issuers (and acquirers) should be paid on a per
transaction basis.
• If interchange fee is at par, consumers would be charged and in
case merchants would discount.
• The tourist test is not a competition price (nothing guarantees the
zero profit condition). It is a monopoly price.
Conclusions
• By eliminating the no discrimination rule and the
interchange fee opportunistic behaviours (on the part of
card holders) would be eliminated
• Issuing banks and acquiring banks would compete on
prices without the constraint of the interchange fee (both
on the price level and on the way to charge).
• Retailers and consumers would choose on the basis of
costs and benefits
• Innovation in payment system would be promoted without
constraints on pricing
• Is the elimination of the interchange fee an objective to
be achieved by antitrust enforcement?
• I changed my mind on this and now my position is …
YES