The role of the interchange fee in card payment systems

Posted by D. Daniel Sokol

Eva Keszy-Harmath (Magyar Nemzeti Bank (central bank of Hungary)), Gergely Koczan (Magyar Nemzeti Bank (central bank of Hungary)), Surd Kovats (Hungarian Competition Authority (GVH)), Boris Martinovic (Hungarian Competition Authority (GVH)), and Kristof Takacs (Magyar Nemzeti Bank (central bank of Hungary)) explore The role of the interchange fee in card payment systems.

ABSTRACT: The interchange fee applied in four-party card systems transfers incomes in the payment card business from merchants to cardholders. Assessment of the interchange fee and the interpretation of its role have prompted serious professional debate in recent years. Beyond the professional debate, competition proceedings were also launched in connection with interbank agreements related to the interchange fee and the setting of the fee, but so far specific regulation has been adopted only in a few countries. The first part of the study describes the function of the interchange fee and the related economic theories, followed by a discussion of issues arising in connection with the interchange fee from the point of view of competition authorities and regulators. The second part of the study presents the results of analyses relating to the Hungarian payment card market and interchange fees. On the basis of these results, we conclude that prudent regulatory intervention, taking into account both primary and secondary market effects, may be justified in relation to the interchange fee, due to the structure and level of development of the Hungarian market.