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The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

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The Neutrality of Interchange Fees in Payment Systems

Joshua S Gans1 / Stephen P King2

1Melbourne Business School, University of Melbourne,

2Melbourne Business School,

Citation Information: Topics in Economic Analysis & Policy. Volume 3, Issue 1, ISSN (Online) 1538-0653, DOI: 10.2202/1538-0653.1069, January 2003

Publication History

Published Online:
2003-01-09

Abstract

There has been considerable public debate over the effect of interchange fees on credit card transactions. Regulators in Australia and Europe have argued that these fees can be set by banks to have an anticompetitive effect. In the US, it has been argued that these fees, together with a rule that prevents a surcharge for credit purchases, might create a cross subsidy between cash and credit customers. Academics have noted that, in particular circumstances, interchange fees have no real effects in the absence of such a no-surcharge rule. This paper demonstrates that the potential neutrality of interchange fees is a general result. We show that in the absence of a no surcharge rule or, alternatively, if there is perfect competition at the merchant level, interchange fees can be changed without leading to any real effects. This result does not depend on the degree or nature of competition at either the bank or the merchant level. We conclude that the elimination of no surcharge rules may provide practical policy solutions for authorities concerned about the level of interchange fees.

Keywords: credit card associations; payment systems; interchange fee; neutrality; no surcharge rule

Citing Articles

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[1]
Stephen P. King
Australian Economic Review, 2013, Volume 46, Number 2, Page 247
[2]
Wilko Bolt, Nicole Jonker, and Corry van Renselaar
Journal of Banking & Finance, 2010, Volume 34, Number 8, Page 1738
[3]
Oz Shy
Review of Industrial Organization, 2011, Volume 38, Number 2, Page 119
[4]
Marianne Verdier
Journal of Economic Surveys, 2011, Volume 25, Number 2, Page 273
[5]
Joshua S. Gans
Journal of Regulatory Economics, 2015, Volume 47, Number 2, Page 183
[6]
RON BORZEKOWSKI, K. KISER ELIZABETH, and AHMED SHAISTA
Journal of Money, Credit and Banking, 2008, Volume 40, Number 1, Page 149
[7]
Julian Wright
The RAND Journal of Economics, 2012, Volume 43, Number 4, Page 761
[8]
Zhu Wang
International Journal of Industrial Organization, 2010, Volume 28, Number 1, Page 86
[9]
Hans Zenger
Journal of Banking & Finance, 2011, Volume 35, Number 10, Page 2544
[10]
Jean-Charles Rochet and Jean Tirole
The RAND Journal of Economics, 2006, Volume 37, Number 3, Page 645
[11]
GRAEME GUTHRIE and JULIAN WRIGHT
Journal of Industrial Economics, 2007, Volume 55, Number 1, Page 37

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