Payments Innovation and Interchange Fees Regulation: How Inverting the Merchant-Pays Business Model Would Affect the Extent and Direction of Innovation

34 Pages Posted: 6 Jul 2011  

David S. Evans

Global Economics Group; University College London

Date Written: June 27, 2011

Abstract

This paper examines the possible impact on innovation involving payment cards as a result of price caps that lead to the drastic reduction in interchange fees. Such reductions invert the traditional business model for the payments card industry from a merchant-pays model to a consumer-pays model. The paper argues that this inversion is likely to reduce the overall level of innovation in the industry, divert innovation away from the role of payments in transactions and towards improvements for which consumers can be charged non-transaction related fees, and discourage the entry of new payment systems.

Keywords: interchange fees, innovation, debit cards, credit cards, payment cards, regulation, two-sided markets

JEL Classification: G21, L40, L50

Suggested Citation

Evans, David S., Payments Innovation and Interchange Fees Regulation: How Inverting the Merchant-Pays Business Model Would Affect the Extent and Direction of Innovation (June 27, 2011). Available at SSRN: https://ssrn.com/abstract=1878825 or http://dx.doi.org/10.2139/ssrn.1878825

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

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