Consumer Credit and Payment Cards

47 Pages Posted: 3 Jan 2012

See all articles by Wilko Bolt

Wilko Bolt

De Nederlandsche Bank (Dutch Central Bank); VU University Amsterdam

Elizabeth Foote

affiliation not provided to SSRN

Heiko Schmiedel

European Central Bank - Securities Settlement Systems Policy Division

Multiple version iconThere are 2 versions of this paper

Date Written: December 27, 2011


We consider debit and credit card networks. Our contribution is to introduce the role of consumer credit into these payment networks, and to assess the way this affects competition and equilibrium fees. We analyze a situation in which overdrafts are associated with current accounts and debit cards, and larger credit lines with ‘grace’ periods are associated with credit cards. If we just introduce credit cards, we find their merchant fees depend not only on the networks’ cost of funds and the probability of default, but also on the interest rates of overdrafts. Whilst debit card merchant fees do not depend on funding costs or default risk in a debit-card only world, this changes when they start to compete with credit cards. First, debit merchant acceptance increases with the default probability, even though merchant fees increase. Second, an increase in funding costs causes a surprising increase in debit merchant fees. Effectively, the bank offering the debit card benefits from consumers maintaining a positive current account balance, when they use their credit instead of their debit card. As a result, this complementarity may lead to relatively high debit card merchant fees as the bank discourages debit card acceptance at the margin.

Keywords: Payment pricing, Card competition, Consumer credit, Complementarity

JEL Classification: L11, G21, D53

Suggested Citation

Bolt, Wilko and Foote, Elizabeth and Schmiedel, Heiko, Consumer Credit and Payment Cards (December 27, 2011). De Nederlandsche Bank Working Paper No. 332. Available at SSRN: or

Wilko Bolt (Contact Author)

De Nederlandsche Bank (Dutch Central Bank) ( email )

P.O. Box 98
1000 AB Amsterdam

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV

Elizabeth Foote

affiliation not provided to SSRN ( email )

Heiko Schmiedel

European Central Bank - Securities Settlement Systems Policy Division ( email )

Directorate General Payment Systems
Kaiserstrasse 29
D-60311 Frankfurt am Main
+49-69 13 44 70 59 (Phone)
+49-69 13 44 60 00 (Fax)

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics