The Economics of Interchange Fee Regulation

Both cardholders and shops benefit when credit or debit cards are used rather than cash. Cardholders benefit from the convenience of using them; shops (merchants) benefit from the lower cost of having them used, relative to cash. In markets of this sort, both parties should pay, reflecting the benefits they receive. Shops therefore should make a payment to card issuers, to support the payment system, not just cardholders. In a four-party card system such as Visa or MasterCard, the payment from shops to card issuers goes via shops’ own banks (the “acquiring bank”). Acquiring banks receive payments from shops (the “merchant service charge”), take their own cut (reflecting their costs and risks), and then pass on the rest to banks that issue cards. The fee passed on is the interchange fee.

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