Interchange Fee Regulation and Service Investments
49 Pages Posted: 12 Sep 2018 Last revised: 30 Jun 2019
Date Written: May 1, 2019
This paper analyzes the impact of interchange fee regulation on the investment incentives of a payment card platform in the presence of full merchant internalization. We distinguish between investment in consumer and retailer services. We ﬁnd that the optimally regulated interchange fee can be above the privately optimal one to induce the platform to invest more in retailer services. We also demonstrate that the two prominent regulatory benchmarks of a zero interchange fee and regulation according to the “tourist test” tend to set too low investment incentives under a total welfare standard. Instead, “tourist test” regulation can be a reasonable approximation under a total user surplus standard.
Keywords: Payment Cards, Interchange Fee, Regulation, Service Investment, Two-Sided Markets
JEL Classification: G21, L31, L42
Suggested Citation: Suggested Citation