Research Discussion Papers, Bank of Finland
No 3/2011:
Debit card interchange fees generally lead to cash-promoting cross-subsidisation
Harry Leinonen ()
Abstract: Cards and cash are competing payment instruments at
point-of-sale. The twosided market platform theory, based on general
benefit assumptions, supports the use of multilateral interchange fees for
card payments as a means of promoting the use of cards. However, analysis
of the issue from the concrete processing cost viewpoint leads to the
opposite conclusion: collection of debit card interchange fees by issuers
results in subsidisation of cash and so actually promotes the use of cash
instead of cards. Banks use card interchange revenues to cover cash
distribution costs. For merchants, interchange fees increase payment costs
and thus reduce the possibilities to pass through to customers the cost
savings flowing from card efficiency. Moreover, because of high merchant
fees due to high interchange fees, merchants are also more reluctant to
accept payment cards. An MIF based on the tourist level approach will
result in all parties being indifferent between cash and cards and thereby
delay the realisation of the cost benefits of increased debit card usage.
The resent actions of authorities to increase transparency and reduce
cross-subsidisation seem to point in the right direction – towards more
efficient resource allocation in payments.
Keywords: interchange fee; cross-subsidies in payments; (follow links to similar papers)
JEL-Codes: G14; G38; L14; L42; L51; (follow links to similar papers)
39 pages, March 11, 2011
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