How Changes in Payment Card Interchange Fees Affect Consumers Fees and Merchant Prices: An Economic Analysis with Applications to the European Union

June 27, 2011

Abstract  

 

A number of jurisdictions are considering imposing price caps on the interchange fees that card issuers receive from merchant acquirers when cardholders pay with their cards. Several have already done so. This paper examines the net impact of these price caps on consumers. The economics of pass-through predicts that issuers would pass on some of their lost revenues to consumers in the form of higher fees while merchants would pass on some of their reduced costs to consumers in the form of lower prices. The net impact depends on the relative magnitude of these two effects. While the answer depends on the parameters for the particular jurisdiction that is imposing the caps, this paper shows that there are asymmetries between the issuer and merchant side that are likely to result in consumers incurring greater costs from increased fees than they obtain in lower costs from merchants thereby resulting in a loss of consumer welfare. Banks are likely to have higher pass-through rates than merchants so that the long-run impact on bank fees is greater than on merchant prices. While the analysis is general we pay particular attention to the situation in the European Union. Read the full report

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* Evans is Chairman of Global Economics Group; Executive Director of the Jevons Institute and Visiting Professor at University College London; and Lecturer at University of Chicago Law School. Mateus is Professor, University of New Lisbon; Director at Global Economics Group; and former First President of the Portuguese Competition Authority. We would like to thank Howard Chang and Scott Walster for helpful comments and suggestions on this paper and the Monnet Project for financial support. We, of course, are solely responsible for the analysis presented in this paper and the views expressed in the paper do not necessarily reflect those of any of these individuals or the organizations that we are affiliated with.