The Theory of Interchange Fees: A Synthesis of Recent Contributions

We synthesize the results of the recent theoretical literature on the determination of interchange fees by payment card associations. We analyze in particular the conditions under which these interchange fees are excessively high, as compared with social optimum. These conditions involve several parameters: the intensity of competition between banks and between merchants; the elasticities of demand on both sides of the market, as well as the degrees of heterogeneity among merchants and among cardholders. A crucial element is the competitive edge that merchants can gain by accepting cards.