University of Auckland

Optimal Interchange Fees

Email address: jk.wright@auckland.ac.nz

Abstract:
A fundamental aspect of any open payment system is the interchange fee that is paid from the merchant's bank to the cardholder's bank. Using a model in which there is partial participation by heterogeneous consumers and merchants, this paper characterizes the privately and socially optimal level of such an interchange fee. It examines how the optimal level of the fee depends on costs, profits margins, pass-through coefficients, participation rates, and membership fees, as well as two different strategic effects arising from competition between merchants.

PDF file of paper: Not available.

Session: Economics of Payment Systems

Time: Friday, 6 July, 3:30pm - 5pm

Room: A