Payment Card Interchange Fees and Price Discrimination

Rong Ding, National University of Singapore (NUS) - Department of Economics and Julian Wright, National University of Singapore (NUS) - Department of Economics discuss Payment Card Interchange Fees and Price Discrimination.

ABSTRACT: We extend and generalize the existing literature on debit and credit card payment platforms by considering a card platform that can price discriminate by setting different interchange fees for different types of retailers. Despite the platform's ability to price discriminate, it will set the average interchange fee too high, resulting in fees for card usage that are too low, and excessive usage of cards. We show this bias does not disappear even if card fees (or rewards) can be conditioned on the retailer the cardholder transacts with and even when merchant internalization is only partial. We compare the outcome to the case in which only a single interchange fee can be set, noting price discrimination can result in a lower average interchange fee although also lower welfare.