An Event Study Analysis of the Impacts of the European Interchange Fee Regulation*

One of the key success factors of the regulatory involvement by the European Commission (EC) in card payment markets across Europe is the reduction of merchant service charges for retailers and final prices for goods and services for consumers. In light of the EC’s scheduled review of the impacts of the policy intervention, this paper evaluates the usability of the event study analysis to determine the impacts of the interchange fee regulation. Findings show that 1 April 2009 is the single, statistically significant date in relation to the regulation. Contrary to common rationale, positive excess returns are recorded for issuers (9 percent-pts), pure issuers (9 percent-pts), and merchants (4.8 percent-pts), primarily driven by previous uncertainty of investors around a potential ban on interchange fees. As a consequence, total market capitalization for the retail industry increased by 11.2 billion Euro. This results in a partial pass-through rate of 46 percent from acquirers to merchants. The event study is deemed a suitable methodology to complement existing research techniques in this field. To determine ultimate pass-through to consumers, further investigation on the prevalent manifestation of issuer–acquirers needs to be conducted.