TY  - JOUR
AU  - Schmalensee,Richard
TI  - Payment Systems and Interchange Fees
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8256
PY  - 2001
Y2  - April 2001
UR  - http://www.nber.org/papers/w8256
L1  - http://www.nber.org/papers/w8256.pdf
N1  - Author contact info:
Richard Schmalensee
MIT Sloan School of Management
100 Main Street, E62-520
Cambridge, MA 02142
Tel: 617/253-2957
Fax: 617/258-6617
E-Mail: rschmal@mit.edu
AB  - In a typical bank credit card transaction, the merchant's bank pays an interchange fee, collectively determined by all participating banks, to the cardholder's bank.  This paper shows how the interchange fee balances charges between cardholders and merchants under imperfect competition.  The privately optimal fee depends mainly on differences between cardholders' and merchants' banks, not their collective market power.  In a non-extreme case, the profit-maximizing interchange fee also maximizes total output and producers' plus consumers' surplus.  There is no economic basis for favoring proprietary payment systems, which do not need interchange fees to balance charges, over the cooperative bank card systems.
ER  -