The Drama of Interchange Fees

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Vitor Bento, Mar 31, 2008

The main problem with the economics of card payments is that cash is used as its yardstick and cash payments, being the most socially inefficient means of payment, are made available at a price significantly below cost (often free of charge). To supply cash payments at a loss and in order to remain a profitable business, banks have to overcharge other services (cross-subsidization). This practice is a legacy from the times when bank services were bundled and jointly remunerated by the financial intermediation margin (interest received minus interest paid). Over time, banks have started unbundling their services and charging them to the direct beneficiaries, while reducing the financial intermediation margin. Nevertheless, cash payments (and check payments in most instances) remained a service offered free of charge, where their “production costs” are subsidized by revenues from other banking activities. If cash could be properly priced, reflecting its social cost, all the discussion around card payments would become less biased.

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