Pricing Debit Card Payment Services: An Io Approach

34 Pages Posted: 14 Feb 2006

See all articles by Wilko Bolt

Wilko Bolt

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

Alexander F. Tieman

International Monetary Fund (IMF)

Date Written: October 2003

Abstract

This paper presents a theoretical framework for analyzing pricing structures in debit card schemes featuring cardholders, retailers, their respective banks, and a network routing switch. The network routing switch controls the electronic debit card network and is jointly owned by the banks. In setting its prices, it needs to consider getting both consumers and retailers to participate in the market. In this two-sided market for debit cards, we show that the double-monopolistic network routing switch may want to supply consumers with cheap debit cards, deriving profits from charging a high retailer fee per transaction. This theoretic result resembles the current practice in the Netherlands where consumers pay no transaction fee, but retailers do. This corner solution carries over when we analyze socially optimal pricing.

Keywords: Debit card payment systems, two-sided monopolistic pricing, social optimum

JEL Classification: G21, L10, L41

Suggested Citation

Bolt, Wilko and Tieman, Alexander F., Pricing Debit Card Payment Services: An Io Approach (October 2003). IMF Working Paper, Vol. , pp. 1-34, 2003. Available at SSRN: https://ssrn.com/abstract=880845

Wilko Bolt (Contact Author)

De Nederlandsche Bank (Dutch Central Bank) ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Alexander F. Tieman

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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