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Ann Finance (2013) 9:525
DOI 10.1007/s10436-011-0177-7
SYMPOSIUM
Received: 13 August 2009 / Accepted: 4 February 2011 / Published online: 19 February 2011 Springer-Verlag 2011
Abstract This paper analyzes equilibrium pricing of payment cards and welfare consequences of payment card competition. In particular, we model competition between debit and credit cards. The paper argues that optimal consumer and merchant fees must take safety, income uncertainty, default risk, and the merchants handling cost of cash into account. Market segmentation where debit and credit cards serve different merchant segments yields a preferred payment mix. However, when markets are segmented, payment card fees do not necessarily reach their socially efcient levels. Hence, thoughtful regulatory intervention regarding merchant fees may still be necessary to raise total surplus.
Keywords Payment card competition Equilibrium pricing Economic efciency
JEL Classication L11 G21 D53
We thank two anonymous referees for many valuable comments, Emilio Calvano, Gabriele Camera, Sujit Chakravorti, Jean-Charles Rochet, and participants of the joint 2009 DNB/ECB conference on Retail Payments: Integration and Innovation and the 2009 New York Fed Workshop on Money and Payments. The views expressed are those of the authors and do not necessarily represent the views of De Nederlandsche Bank, the European Central Bank or the European System of Central Banks.
W. Bolt (B)
Research Department, De Nederlandsche Bank, Amsterdam, The Netherlands e-mail: [email protected]
H. Schmiedel
Payments and Market Infrastructure, European Central Bank, Frankfurt am Main, Germany e-mail: [email protected]
Pricing of payment cards, competition, and efciency: a possible guide for SEPA
Wilko Bolt Heiko Schmiedel
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6 W. Bolt, H. Schmiedel
1 Introduction
The rapid growth of payment cards usage is a striking feature in many advanced economies. Today, payment cards are indispensable for the way consumers buy and merchants sell goods and services. In Europe, the number of debit card transactions per capita increased by more than a factor of 5 across 13 countries during the period 19902005 (Amromin and Chakravorti 2009), and payment cards have now become the most used non-cash payment instrument. Furthermore, payment cards have also been proven to be a simple, safe, and cost-efcient payment instrument. Despite this surge in popularity of payment cards, questions about price determination, surplus extraction, and competitiveness of payment card markets remain.
The present paper studies equilibrium pricing...