Interchange Fee Economics by Jakub Górka

Author:Jakub Górka
Language: eng
Format: epub
ISBN: 9783030030414
Publisher: Springer International Publishing

Source Own compilation

Australian and American reforms of the card payments aimed not only at capping interchange fees but they also attempted to restrict anti-competitive business rules within four-party card schemes that the latter used for exerting market power . Relaxing or abolishing NSR and HACR increased visibility of payment instruments’ costs to end users. Merchants were equipped with more tools for steering consumer choice towards payment methods where acceptance is less expensive. Through discounts, surcharges or simply by deciding which cards to accept or not, merchants’ ability to signal the costs of different means of payment to consumers increased. Moreover, four-party card schemes were prohibited from imposing rules on priority transaction processing routing. Relaxing access regime to four-party schemes created more possibilities for new players to compete for clients.

In all countries capping interchange fees resulted in falling merchant service charges . Falling merchant fees support the growth of card payment acceptance network . Lower costs of acceptance reduce or remove the entry barrier to card acceptance for merchants. In particular Spain was the country, where reductions in interchange fees influenced smaller merchants to start accepting cards, because in Spain merchant card acceptance was far from complete. In Australia and especially in the USA it was not the case. Card payments had been widely accepted before the reform. Regulators in those countries never verbalised that their objective was to trigger growth in card acceptance by lowering interchange fees. Instead their intention was to lower the cost burden on merchants and consumers , improve the card system’s transparency and increase card usage .

In all three countries card usage continued their healthy growths or even accelerated after the reforms. In Spain a strong indirect network effect was detected. More card accepting merchants contributed to higher utility of cards for consumers and drove card usage. The process was self-reinforcing. In Australia debit card payments benefitted more from interchange fee caps . Their growth surpassed the growth of credit card payments , which was the RBA goal. According to studies on payment instruments’ social costs (see, e.g., Schmiedel et al. 2012) credit cards are among the least socially efficient payment methods. Debit cards and cash are socially more cost-efficient. Social (or societal) costs are resource costs of producing payment services with given payment instruments. Social costs are calculated as the sum of internal costs of all parties engaged in the payment service (central bank, commercial banks , subcontractors, merchants, consumers ) or alternatively as the sum of all parties’ private costs after netting out cost items that constitute revenues of one party and external costs of another. Merchant fees are an example of those private (external) cost items which net out in the calculation of social costs. On the other hand, credit cards , despite their low social cost efficiency , are far more profitable for issuing banks than other payment instruments, including debit cards . For this reason credit card usage is promoted by issuing institutions. In Spain and in the USA the interchange

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