Economic Brief

October 2013, No. 13-10

Welfare Analysis of Debit Card Interchange Fee Regulation

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Merchants pay interchange fees to card issuers when they accept credit or debit cards as payment. Many merchants have complained that the fees far exceed issuers' costs for processing such transactions. In response to those complaints, Congress directed the Federal Reserve to impose a cap on debit card interchange fees. The cap lowered interchange fees for most merchants, but it yielded some unintended consequences. An analysis of the payment-card market suggests several factors to consider, in addition to issuer costs, when setting interchange fees to maximize social welfare.

Additional Resources

Haltom, Renee, Tim Mead, and Margaretta Blackwell, "The Role of Interchange Fees on Debit and Credit Card Transactions in the Payments System," Federal Reserve Bank of Richmond Economic Brief, May 2011.

Hayashi, Fumiko, "Discounts and Surcharges: Implications for Consumer Payment Choice," Federal Reserve Bank of Kansas City Payments System Research Briefing, June 2012.

Hayashi, Fumiko, "The New Debit Card Regulations: Effects on Merchants, Consumers, and Payments System Efficiency," Federal Reserve Bank of Kansas City Economic Review, First Quarter 2013, pp. 89–118.

Rochet, Jean-Charles, and Jean Tirole, "Two-Sided Markets: A Progress Report," RAND Journal of Economics, Fall 2006, vol. 37, no. 3, pp. 645–667. (A working paper version is available online.)

Rochet, Jean-Charles, and Jean Tirole, "Must-Take Cards: Merchant Discounts and Avoided Costs," Journal of the European Economic Association, June 2011, vol. 9, no. 3, pp. 462–495. (A working paper version is available online.)

Wang, Zhu, "Debit Card Interchange Fee Regulation: Some Assessments and Considerations," Federal Reserve Bank of Richmond Economic Quarterly, Third Quarter 2012, vol. 98, no. 3, pp. 159–183.

Wang, Zhu, "Demand Externalities and Price Cap Regulation: Learning from a Two-Sided Market," Federal Reserve Bank of Richmond Working Paper No. 13-06, May 2013.