Tourist Test interchange fees for card payments: down or out?

ABSTRACT In this paper we show the notional development of the level of the multilateral interchange fee (MIF) for debit card payments, based on the Tourist Test methodology. The attraction of this methodology in the short run is that card acceptance will not increase merchants' operating costs. However, using Dutch cost data for 2002 and 2009 we show that in the long run this method may lead to rising costs for merchants. The outcomes show that this notional MIF would increase from 0.2% to 0.5% of the transaction size of an average debit card payment. If card acquirers would pass such an increase on by raising acquiring fees then merchants will face a considerable increase in operating costs. Our results indicate that application of the Tourist Test methodology may not lead to a suitable benchmark tool for regulation, at least for countries such as the Netherlands, with rising costs for cash and declining costs for debit card payments.