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The B.E. Journal of Economic Analysis & Policy

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

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Friebel, Guido / Mendola, Mariapia / Requate, Till / Tsui, Kevin / Wichardt, Philipp / Zulehner, Christine

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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

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