Interchange Fees
Impact on Consumers and
Merchants
Frank Maier-Rigaud, Senior Economist.
OECD Competition Division,
frank.maier-rigaud@oecd.org
3 angles on interchange fees
• “Cost based” or “fee for service” angle
• Regulatory angle
– Total welfare, efficiency
– Fairness, redistributive aspects
• Competition Law angle
– Collective price fixing agreement
– Consumer welfare
2 impacts, 2 themes
• Consumers (regulatory angle)
– Who gains and who looses from
credit card payments? (Scott Schuh,
Oz Shy and Joanna Stavins)
• Merchants and Consumers again
(competition angle)
– comments on the Tourist Test
Impact on consumers
Idea that cash users subsidize card payers can be
traced to Carlton and Frankel (1995)
Frankel (1998) is the first to connect the subsidy to a
transfer from low- to high-income buyers
The logical reverse effect (from card to cash) in case
merchant costs exceed card costs was shown by
McAndrews and Wang (2008)
Schuh, Shy and Stavins (working paper 2011) compute
estimates based on a calibrated model of who gains
and who looses from credit card usage in the US
Who Gains and Who Loses: key findings
• Schuh, Shy and Stavins (working paper
2011) find two types of transfers among
buyers:
• From cash to card users
– (from cash and “revolving” card users to
“convenience” card users)
• From low-income to high-income
households
Empirical Estimates
• On average, each cash-using household transfers
$50 to households that use credit cards and each
credit card using household receives a subsidy of
$240 every year
• Card users with unpaid revolving debt pay a
transfer of $511 and convenience users receive a
subsidy of $833
• On average, the lowest-income households
($20000 or less annually) pay $63 and the
highest income households ($150000 or more
annually) receives $823 every year
Simplified US payment market
Schuh, Shy and Stavins (2011)
EU MasterCard case
• EU MasterCard case:
– Article 101(1) TFEU: MIF is a collectively set price
with the object or effect of restricting price
competition between acquiring banks
– Article 101(3) TFEU: MasterCard failed to prove that
a fair share of any positive effects on innovation and
efficiency were passed on to consumers
• EU states (MEMO/09/143) “Of particular importance is
the question of whether, in setting a MIF a scheme uses a
methodology that aims from the outset at guaranteeing
that cardholders and merchants obtain a fair share of the
benefits”
• Merchants are consumers of acquiring services
More Commission quotes
• “the ‘tourist test’ provides a reasonable
benchmark for assessing a MIF level that
generates benefits to merchants and final
consumers”
• The revised “tourist test” MIF “was
calculated by comparing merchants’ costs
of accepting payments in cash to those of
accepting payments made by a payment
card”
Quo Vadis Tourist Test
• Tourist test is at best a static regulatory
benchmark (but see e.g. Schuh,Shy and
Stavins)
• If competition authorities believe in their
qualification of interchange fees, they
should be prepared to embrace the logical
consequences
A few conclusions(?)
• 2-sided market theory is ingenious, beautiful
• The concepts of network and usage externalities
prevail rightly over cost-based approaches
• Perfect surcharge approaches are a model
platonic curiosity 41 years after Coase‘s problem
of social cost but represent an empirical
challenge to competition authorities
• Reliable empirical estimates of the socially
optimal IF and social losses associated with
lower (or zero IF) are lacking
• Tourist test is (by definition) an unsuitable
antitrust benchmark