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

Wilko Bolt*, Heiko Schmiedel

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

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.

Original languageEnglish
Pages (from-to)5-25
Number of pages21
JournalAnnals of Finance
Volume9
Issue number1
DOIs
Publication statusPublished - 2013

Keywords

  • Economic efficiency
  • Equilibrium pricing
  • Payment card competition

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