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Interchange Fees and Innovation in Payment Systems

Author

Listed:
  • Marc Bourreau

    (Telecom ParisTech)

  • Marianne Verdier

    (Université Paris 2 Pantheon Assas
    MINES ParisTech, PSL - Research University)

Abstract

We analyze the impact of interchange fees on consumers’ and merchants’ incentives to adopt an innovative payment instrument, in a setting with adoption externalities between consumers and merchants. We show that consumer adoption decreases with the interchange fee for high degrees of externality, and varies non-monotonically with it for low degrees of externality. The profit-maximizing interchange fee coincides with the social optimum when externalities are strong, whereas it is too high when they are weak. We also compare the issuers’ incentives to innovate when they cooperate and when they make their innovation decisions independently.

Suggested Citation

  • 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.
    • Handle: RePEc:kap:revind:v:54:y:2019:i:1:d:10.1007_s11151-018-9648-6
    DOI: 10.1007/s11151-018-9648-6
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    Cited by:

    1. Reisinger, Markus & Zenger, Hans, 2019. "Interchange fee regulation and service investments," International Journal of Industrial Organization, Elsevier, vol. 66(C), pages 40-77.
    2. Hongru Tan, 2020. "The regulation of merchant fees in credit card markets," Journal of Regulatory Economics, Springer, vol. 57(3), pages 258-276, June.
    3. Wilko Bolt, 2012. "Retail Payment Systems: Competition, Innovation, and Implications," DNB Working Papers 362, Netherlands Central Bank, Research Department.

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