Annals of Finance

, Volume 9, Issue 1, pp 5–25

Pricing of payment cards, competition, and efficiency: a possible guide for SEPA

Symposium

DOI: 10.1007/s10436-011-0177-7

Cite this article as:
Bolt, W. & Schmiedel, H. Ann Finance (2013) 9: 5. doi:10.1007/s10436-011-0177-7
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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 merchant’s 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 efficient levels. Hence, thoughtful regulatory intervention regarding merchant fees may still be necessary to raise total surplus.

Keywords

Payment card competitionEquilibrium pricingEconomic efficiency

JEL Classification

L11G21D53

Copyright information

© Springer-Verlag 2011

Authors and Affiliations

  1. 1.Research DepartmentDe Nederlandsche BankAmsterdamThe Netherlands
  2. 2.Payments and Market InfrastructureEuropean Central BankFrankfurt am MainGermany