A Model of the Card Payment System and the Interchange Fee

32 Pages Posted: 29 Dec 2002

See all articles by Paul De Grauwe

Paul De Grauwe

CESifo (Center for Economic Studies and Ifo Institute for Economic Research); London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Laura Rinaldi

KU Leuven - Center for Economic Studies

Date Written: October 2002

Abstract

We analyse a card payment system to assess the economic impact of the interchange fee. This fee is paid by the bank of the merchant, the acquirer, to the bank of the consumer, the issuer. We build up a model in order to explore whether the interchange fee can enhance the participation in the system and thus increase the benefits of the system as a whole. We also investigate what kind of incentives the interchange fee provides to the actors of he system. We show that the interchange fee selected by the card associations differs from the one that would be selected by a welfare-maximising social planner. Moreover, the interchange fee selected by the market is likely to produce a smaller market for cards than the socially optimal one.

JEL Classification: E42

Suggested Citation

De Grauwe, Paul and De Grauwe, Paul and Rinaldi, Laura, A Model of the Card Payment System and the Interchange Fee (October 2002). Available at SSRN: https://ssrn.com/abstract=348441 or http://dx.doi.org/10.2139/ssrn.348441

Paul De Grauwe (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Laura Rinaldi

KU Leuven - Center for Economic Studies ( email )

Naamsestraat 69
Leuven, B-3000
Belgium
+32.16.326 842 (Phone)
+32.16.326 796 (Fax)

HOME PAGE: http://www.econ.kuleuven.ac.be/ew/academic/intecon/Rinaldi/CV%20economic.pdf

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