Why Do Card Issuers Charge Proportional Fees?

Federal Reserve Bank of Kansas City Working Paper No. 08-13

20 Pages Posted: 31 Jan 2009

See all articles by Oz Shy

Oz Shy

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Zhu Wang

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: December 21, 2008

Abstract

This paper explains why payment card companies charge consumers and merchants fees which are proportional to the transaction values instead of charging a fixed per-transaction fee. Our theory shows that, even in the absence of any cost considerations, card companies earn much higher profit when they charge proportional fees. It is also shown that competition among merchants reduces card companies' gains from using proportional fees relative to a fixed per-transaction fee. Merchants are found to be the losers from proportional fees whereas consumer and social welfare are invariant with respect to the two types of fees.

Keywords: Payment cards, proportional and fixed fees, two-sided market

JEL Classification: D4, L1, G2

Suggested Citation

Shy, Oz and Wang, Zhu, Why Do Card Issuers Charge Proportional Fees? (December 21, 2008). Federal Reserve Bank of Kansas City Working Paper No. 08-13. Available at SSRN: https://ssrn.com/abstract=1335337 or http://dx.doi.org/10.2139/ssrn.1335337

Oz Shy

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

HOME PAGE: http://https://www.frbatlanta.org/research/economists/shy-oz.aspx

Zhu Wang (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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