Card Surcharges and Cash Discounts: Simple Economics and Regulatory Lessons

Helene Bourguignon, Renato Gomes, Jean Tirole, Jan 30, 2015

The role of payment cards in modern economies can hardly be underrated. In 2013, debit and credit card transactions represented roughly half of all consumer payment transactions in Western Europe, and accounted for more than 45% of all payment transactions in the United States. The payment card industry has faced intense antitrust scrutiny on both sides of the Atlantic, partly in response to the merchants’ recurrent complaints about high transaction fees. In the past, regulation has mainly targeted the fees imposed by payment card networks. For instance, the most commonly used regulatory instrument caps the “interchange fee,” which is the payment made by the merchant’s bank (called the acquirer) to the cardholder’s bank (the issuer). This interchange fee in turn impacts the merchant fee, which has sparked the controversy in the first place. The last few years have witnessed a renewed interest in policies allowing merchants to differentiate price according to payment choice. Absent public regulation on the matter, payment systems (open systems such as Visa and MasterCard, but also closed systems such as Amex, PayPal, and Google Wallet) have prohibited merchants from levying surcharges on their own payment method (the so called “no surcharge rule”). Arguably, one natural alternative to traditional regulation of interchange fees is to let merchants price discriminate as a function of payment method, allowing them to pass through to consumers any excessive merchant fees. The primary object of this note is to shed light on this debate, and clarify how optimal regulation of cash discounts/card surcharges by merchants is related to traditional modes of regulation of merchant fees.