Impact of interchange fees on a nonsaturated multi-agent payment card market

What is it about?

The impact that the level of interchange fees has on the payment adoption rate in a non-saturated market is investigated. This study is performed under different degrees of consumers' and merchants' awareness of the benefits arriving from the network externalities. In a fort-party scheme, we model explicitly the interactions between consumers and merchants at the point of sale. The interchange fees flow form the acquirers to issuers. We allow card issuers to charge consumers with fixed fees and provide net benefits from card usage whereas acquirers could charge fixed and transactional fees to the merchants. Merchant's transactional fees are determined proportionally to the level of interchange fees. We establish that, under this scheme, the two-sided nature of the market lead to higher adoption rates with lower interchange fees.

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Photo by Two Paddles Axe and Leatherwork on Unsplash

Photo by Two Paddles Axe and Leatherwork on Unsplash

Why is it important?

We allow card issuers to charge consumers with fixed fees and provide net benefits from card usage whereas acquirers could charge fixed and transactional fees to the merchants. Merchant's transactional fees are determined proportionally to the level of interchange fees. We find that the two-sided nature of the market lead to higher adoption rates with lower interchange fees.

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