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Why Do Payment Card Networks Charge Proportional Feeds?

Author

Listed:
  • Oz Shy
  • Zhu Wang
Abstract
This paper explains why payment card companies charge consumers and merchants fees which are proportional to the transaction values instead of charging a fixed per-transaction fee. Our theory shows that, even in the absence of any cost considerations, card companies earn much higher profit when they charge proportional fees. It is also shown that competition among merchants reduces card companies' gains from using proportional fees relative to a fixed per-transaction fee. Merchants are found to be the losers from proportional fees whereas consumer and social welfare are invariant with respect to the two types of fees. ; Also issued as a Payments System Research Working Paper.

Suggested Citation

  • Oz Shy & Zhu Wang, 2008. "Why Do Payment Card Networks Charge Proportional Feeds?," Research Working Paper RWP 08-13, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:rwp08-13
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    File URL: https://www.kansascityfed.org/documents/5325/pdf-rwp08-13.pdf
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    References listed on IDEAS

    as
    1. Marc Rysman, 2009. "The Economics of Two-Sided Markets," Journal of Economic Perspectives, American Economic Association, vol. 23(3), pages 125-143, Summer.
    2. Wilko Bolt & Sujit Chakravorti, 2008. "Economics of payment cards: a status report," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 32(Q IV), pages 15-27.
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    4. Julian Wright, 2004. "The Determinants of Optimal Interchange Fees in Payment Systems," Journal of Industrial Economics, Wiley Blackwell, vol. 52(1), pages 1-26, March.
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    13. Fumiko Hayashi, 2009. "Do U.S. consumers really benefit from payment card rewards?," Economic Review, Federal Reserve Bank of Kansas City, vol. 94(Q I), pages 37-63.
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    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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