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The Role of Interchange Fees in Two-Sided Markets: An Empirical Investigation on Payment Cards

Author

Listed:
  • Santiago Carbó Valverde

    (Bangor Business School)

  • Sujit Chakravorti

    (Federal Reserve Bank of Chicago)

  • Francisco Rodríguez Fernández

    (University of Granada)

Abstract

We study the impact of reductions in interchange fees on payment card services. We find that consumer and merchant acceptance and transaction volumes increased when interchange fees were reduced. Our results suggest that a 10% reduction in the rate of decline per quarter in the average interchange fee by an acquirer resulted in a rate of increase in merchant acceptance per quarter of up to 1.4%. In addition, a 10% increase in the rate of interaction of merchant acceptance and the total number of cards increased the rate of quarterly issuer transaction volumes up to 1.7%.

Suggested Citation

  • Santiago Carbó Valverde & Sujit Chakravorti & Francisco Rodríguez Fernández, 2016. "The Role of Interchange Fees in Two-Sided Markets: An Empirical Investigation on Payment Cards," The Review of Economics and Statistics, MIT Press, vol. 98(2), pages 367-381, May.
    • Handle: RePEc:tpr:restat:v:98:y:2016:i:2:p:367-381
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    Citations

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    Cited by:

    1. Kim Huynh & Gradon Nicholls & Oleksandr Shcherbakov, 2022. "Equilibrium in Two-Sided Markets for Payments: Consumer Awareness and the Welfare Cost of the Interchange Fee," Staff Working Papers 22-15, Bank of Canada.
    2. Xing Wan & Javier Cenamor & Geoffrey Parker & Marshall Van Alstyne, 2017. "Unraveling Platform Strategies: A Review from an Organizational Ambidexterity Perspective," Sustainability, MDPI, vol. 9(5), pages 1-18, May.
    3. Mark D. Manuszak & Krzysztof Wozniak, 2017. "The Impact of Price Controls in Two-sided Markets : Evidence from US Debit Card Interchange Fee Regulation," Finance and Economics Discussion Series 2017-074, Board of Governors of the Federal Reserve System (U.S.).
    4. Jan Frederic Nerbel & Markus Kreutzer, 2023. "Digital platform ecosystems in flux: From proprietary digital platforms to wide-spanning ecosystems," Electronic Markets, Springer;IIM University of St. Gallen, vol. 33(1), pages 1-20, December.
    5. Chang Jing & Hou Ke & Zhu Yangpeng, 2023. "Performance investment and price decisions of two‐sided platforms under multiple quality regulation strategies," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(4), pages 2148-2158, June.
    6. Barbosa, Klenio & Rocha, Bruno de Paula & Pereira, Luan Michel & Passos, Luiz Fernando, 2024. "Payment card interchange fee regulation and financial institutions: The effects on traditional and fintech financial conglomerates," Finance Research Letters, Elsevier, vol. 64(C).
    7. Kim Huynh & Gradon Nicholls & Oleksandr Shcherbakov, 2019. "Explaining the Interplay Between Merchant Acceptance and Consumer Adoption in Two-Sided Markets for Payment Methods," Staff Working Papers 19-32, Bank of Canada.
    8. Mariotto Carlotta & Verdier Marianne, 2017. "Who Pays for Card Payments? A General Model on the Role of Interchange Fees," Review of Network Economics, De Gruyter, vol. 16(3), pages 307-349, September.
    9. Kajol, K. & Singh, Ranjit & Paul, Justin, 2022. "Adoption of digital financial transactions: A review of literature and future research agenda," Technological Forecasting and Social Change, Elsevier, vol. 184(C).
    10. 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.
    11. Binner, Jane M. & Chaudhry, Sajid & Kelly, Logan & Swofford, James L., 2018. "“Risky” monetary aggregates for the UK and US," Journal of International Money and Finance, Elsevier, vol. 89(C), pages 127-138.
    12. Malte Krüger, 2019. "Multilaterale Interchange-Gebühren: Man sollte das Kind nicht mit dem Bade ausschütten," ROME Working Papers 201905, ROME Network.

    More about this item

    Keywords

    consumer choice; merchant adoption; payment cards;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets

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