How Changes in Payment Card Interchange Fees Affect Consumers Fees and Merchant Prices: An Economic Analysis with Applications to the European Union

48 Pages Posted: 6 Jul 2011

See all articles by David S. Evans

David S. Evans

Global Economics Group; University College London

Abel M. Mateus

affiliation not provided to SSRN

Date Written: June 27, 2011

Abstract

A number of jurisdictions are considering imposing price caps on the interchange fees that card issuers receive from merchant acquirers when cardholders pay with their cards. Several have already done so. This paper examines the net impact of these price caps on consumers. The economics of pass-through predicts that issuers would pass on some of their lost revenues to consumers in the form of higher fees while merchants would pass on some of their reduced costs to consumers in the form of lower prices. The net impact depends on the relative magnitude of these two effects. While the answer depends on the parameters for the particular jurisdiction that is imposing the caps, this paper shows that there are asymmetries between the issuer and merchant side that are likely to result in consumers incurring greater costs from increased fees than they obtain in lower costs from merchants thereby resulting in a loss of consumer welfare. Banks are likely to have higher pass-through rates than merchants so that the long-run impact on bank fees is greater than on merchant prices. While the analysis is general we pay particular attention to the situation in the European Union.

Keywords: interchange fees, waterbed, debit cards, two-sided markets, checking accounts, credit cards

JEL Classification: G21, L40, J40

Suggested Citation

Evans, David S. and Mateus, Abel M., How Changes in Payment Card Interchange Fees Affect Consumers Fees and Merchant Prices: An Economic Analysis with Applications to the European Union (June 27, 2011). Available at SSRN: https://ssrn.com/abstract=1878735 or http://dx.doi.org/10.2139/ssrn.1878735

David S. Evans (Contact Author)

Global Economics Group ( email )

111 Devonshire St.
Suite 900
Boston, MA 02108
United States

University College London ( email )

Gower St
London WC1E OEG, WC1E 6BT
United Kingdom

Abel M. Mateus

affiliation not provided to SSRN ( email )

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