Jean Tirole, Mar 30, 2011
A key input of our modern economies, payment cards are ubiquitous; debit and credit cards offer a wide range of alternatives to cash and checks to operate brick and mortar, e- and mobile phone, and P2P payments. The contours of the industry are rapidly changing. The payment card industry is also becoming one of the most heavily regulated industries in some parts of the world. The United States and Europe, as well as a number of other jurisdictions across the world, have been or are in the process of regulating inter alia, the network-determined payment made by the merchant’s bank (called the acquirer) to the cardholder’s bank (the issuer). This “Interchange Fee” has been the object of much controversy and the theoretical underpinnings of its regulation are still debated. The primary object of this note is to clarify the considerations that should be brought to bear on the determination of regulated fees. It argues that some broadly contemplated regulatory methodologies bear only limited resemblance with economically sound precepts. Finally, it derives some implications of these regulations for the likely evolution of the payment card industry.