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The price effects of reducing payment card interchange fees

Author

Listed:
  • Bita Shabgard

    (Universitat de les Illes Balears)

  • Javier Asensio

    (Universitat Autònoma de Barcelona)

Abstract

In this paper we empirically address the issue of whether reductions in card payment interchange fees have a significant impact on prices paid by consumers. The answer to this question is at the core of most competition policy cases and regulations that have been applied to card payment markets. Relying on Rochet and Tirole’s (RandJEcon 33:549–570, 2002) model of this sector as a two-sided market, we identify the two channels through which interchange fee reductions may influence retail prices: the impact on cards’ demand and on the merchant service charge, which may be passed through to retail prices. We use Spanish sectoral data to estimate the resulting system of equations. Our results imply that a 1% reduction in the level of the interchange fee leads to a long run 0.17% reduction in the retail price index. Such outcome is almost exclusively the result of the interchange fees being passed through as lower prices by merchants, as we find that they have a negligible impact on payment cards’ usage.

Suggested Citation

  • Bita Shabgard & Javier Asensio, 2023. "The price effects of reducing payment card interchange fees," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 14(2), pages 189-221, June.
    • Handle: RePEc:spr:series:v:14:y:2023:i:2:d:10.1007_s13209-023-00278-y
    DOI: 10.1007/s13209-023-00278-y
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    References listed on IDEAS

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    Cited by:

    1. Felt, Marie-Hélène & Hayashi, Fumiko & Stavins, Joanna & Welte, Angelika, 2023. "Regressive effects of payment card pricing and merchant cost pass-through in the United States and Canada," Journal of Banking & Finance, Elsevier, vol. 154(C).

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    More about this item

    Keywords

    Interchange fee; Card payment network; Two-sided markets; Retail prices;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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