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Interchange fees and incentives to invest in payment card systems

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  • Verdier, Marianne

Abstract

Interchange fees are interbank transfers that are used by payment platforms to allocate the total cost of a payment card transaction between the cardholder's bank (the Issuer) and the merchant's bank (the Acquirer). Each time a consumer pays by card, the Issuer of the card pays an interchange fee to the Acquirer of the transaction. In this paper, I study how banks' investments in payment card systems impact the privately and the socially optimal interchange fees. I show that if the Acquirer's contribution to investments is high, and if the consumers benefit more than the merchants from investments, the payment platform may decide to lower the interchange fee so as to encourage banks' investments in quality.

Suggested Citation

  • Verdier, Marianne, 2010. "Interchange fees and incentives to invest in payment card systems," International Journal of Industrial Organization, Elsevier, vol. 28(5), pages 539-554, September.
    • Handle: RePEc:eee:indorg:v:28:y:2010:i:5:p:539-554
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    References listed on IDEAS

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    Cited by:

    1. Börestam, Ann & Schmiedel, Heiko, 2011. "Interchange fees in card payments," Occasional Paper Series 131, European Central Bank.
    2. Creti, Anna & Verdier, Marianne, 2014. "Fraud, investments and liability regimes in payment platforms," International Journal of Industrial Organization, Elsevier, vol. 35(C), pages 84-93.
    3. Anna Creti & Marianne Verdier, 2011. "Fraud, Investments and Liability Regimes in Payment Platforms," EconomiX Working Papers 2011-31, University of Paris Nanterre, EconomiX.
    4. Schmiedel, Heiko & Börestam, Ann, 2011. "Interchange fees in card payments," Occasional Paper Series 131, European Central Bank.
    5. Marc Bourreau & Marianne Verdier, 2019. "Interchange Fees and Innovation in Payment Systems," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 54(1), pages 129-158, February.
    6. Rysman Marc & Wright Julian, 2014. "The Economics of Payment Cards," Review of Network Economics, De Gruyter, vol. 13(3), pages 303-353, September.
    7. Creti, Anna & Verdier, Marianne, 2011. "Fraud, investments and liability regimes in payment platforms," Working Paper Series 1390, European Central Bank.
    8. Verdier, Marianne, 2012. "Interchange fees and inefficiencies in the substitution between debit cards and cash," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 682-696.
    9. Julian Wright, 2012. "Why payment card fees are biased against retailers," RAND Journal of Economics, RAND Corporation, vol. 43(4), pages 761-780, December.
    10. Reisinger, Markus & Zenger, Hans, 2019. "Interchange fee regulation and service investments," International Journal of Industrial Organization, Elsevier, vol. 66(C), pages 40-77.

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