Regulatory Intervention in Card Payment Systems: An Analysis of Regulatory Goals and Impact

51 Pages Posted: 4 Apr 2019

Date Written: September 21, 2018

Abstract

This paper assesses the extent to which regulatory intervention targeting interchange fees has been consistent with the economic theory of two-sided markets and examines the available evidence on the impact of these regulations. The last two decades have seen a drive to regulate the interchange fees of open payment card systems that was primarily motivated by merchants’ complaints. Although pursuing the same objective of decreasing interchange fees, the theoretical and legal basis for interventions were diverse and often based on questionable premises. Economic research on two sided markets has shown that prices in such markets serve to distribute the costs and benefits of the system among the different types of users in a way that maximizes their voluntary participation. Prices to the different types of users are not mainly determined by costs but by the value that these users indirectly bring to the system, contributing to its attractiveness for other users. Regulatory interventions were mostly founded on a partial analysis of payment card systems and their impact was riddled with unintended consequences. Besides a transfer of rent from consumers and issuing banks to mostly large merchants, there is no empirical evidence that any other policy objectives in the form of overall efficiency or consumer welfare was achieved. Two decades of regulatory intervention in payment card systems provide sufficient evidence to call for much caution for further intervention in an increasingly dynamic and fast changing market.

Keywords: payment cards, interchange fee, platform competition, two-sided markets, interchange fees, credit cards

JEL Classification: D04, L11, L4, L41,L84,K21

Suggested Citation

Garces, Eliana and Lutes, Brent, Regulatory Intervention in Card Payment Systems: An Analysis of Regulatory Goals and Impact (September 21, 2018). Available at SSRN: https://ssrn.com/abstract=3346472 or http://dx.doi.org/10.2139/ssrn.3346472

Eliana Garces (Contact Author)

Analysis Group ( email )

800 17th St. NW
Washington, DC 20006
United States

Brent Lutes

U.S. Copyright Office ( email )

101 Independence Avenue, S.E.
COP/REG
Washington, DC 20559-0001
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
248
Abstract Views
1,098
Rank
254,250
PlumX Metrics