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Payment Systems and Interchange Fees

Payment Systems and Interchange Fees 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Industrial Economics Wiley

Payment Systems and Interchange Fees

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References (19)

Publisher
Wiley
Copyright
Blackwell Publishers Ltd 2002
ISSN
0022-1821
eISSN
1467-6451
DOI
10.1111/1467-6451.00170
Publisher site
See Article on Publisher Site

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.

Journal

The Journal of Industrial EconomicsWiley

Published: Jun 1, 2002

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