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Why Do Debit Card Networks Charge Percentage Fees?

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  • David A. Price
  • Zhu Wang

Abstract

Why do debit card networks base their fees on a percentage of transaction amounts when the marginal cost of executing a transaction does not vary by amount? Research suggests that this type of fee structure, a linear ad valorem fee, maximizes profits for card networks by allowing price discrimination. Also, because percentage fees make card usage more economical for lower-value transactions, such a fee structure tends to increase social welfare.

Suggested Citation

  • David A. Price & Zhu Wang, 2013. "Why Do Debit Card Networks Charge Percentage Fees?," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, issue Feb.
    • Handle: RePEc:fip:fedreb:00013
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