Who Pays for Card Payments? A General Model on the Role of Interchange Fees

Abstract When a consumer pays by card, the merchant’s bank pays to the consumer’s bank an interchange fee. In this article, we construct a general model of a card platform that unifies the literature on interchange fees. We enrich the existing frameworks by analyzing the choice of the interchange fee when consumer demand is elastic to retail prices. We show that the difference between the privately set structure of payment card fees and the socially optimal one depends both on banks’ and merchants’ pass-through of their costs to consumers. We argue that the maturity of the payment card market impacts the redistributive effects of interchange fees (i.e. between consumers and merchants, card and cash users) and therefore, their optimal regulation.