The Determinants of Optimal Interchange Fees in Payment Systems

University of Auckland Working Paper No. 220

46 Pages Posted: 6 Aug 2001

See all articles by Julian Wright

Julian Wright

National University of Singapore (NUS) - Department of Economics

Date Written: July 19, 2001

Abstract

A fundamental aspect of any open payment system is the interchange fee that is paid from the merchant's bank to the cardholder's bank. Using a model in which there is partial participation by heterogeneous consumers and merchants, this paper characterizes the output maximizing, profit maximizing and welfare maximizing level of such an interchange fee. It examines how the optimal level of the fee depends on costs, profits margins, pass-through coefficients, participation rates, and membership fees, as well as two different strategic effects arising from competition between merchants. It also determines the factors which drive deviations between the output maximizing, profit maximizing, and welfare maximizing interchange fees.

Keywords: Payment Systems, Credit Card, Debit, Interchange Fees, Interconnection

JEL Classification: G21, L31, L42

Suggested Citation

Wright, Julian, The Determinants of Optimal Interchange Fees in Payment Systems (July 19, 2001). University of Auckland Working Paper No. 220, Available at SSRN: https://ssrn.com/abstract=278045 or http://dx.doi.org/10.2139/ssrn.278045

Julian Wright (Contact Author)

National University of Singapore (NUS) - Department of Economics ( email )

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