Why Do Card Issuers Charge Proportional Fees?
Federal Reserve Bank of Kansas City Working Paper No. 08-13
20 Pages Posted: 31 Jan 2009
Date Written: December 21, 2008
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: Suggested Citation