Multi-Party Payment Card Network Pricing Determination of Merchant and Interchange Fee

29 Pages Posted: 21 Dec 2009 Last revised: 7 Jul 2010

See all articles by Markus Langlet

Markus Langlet

EBS Universität für Wirtschaft und Recht - EBS Business School; Robert Bosch GmbH

Date Written: June 3, 2010

Abstract

In this study, a multi-party payment card network model is constructed to explore the determination of merchant and interchange fees, thereby extending Langlet’s (2009) observation of unitary payment systems. The focus of this analysis was on the impact of consumer price elasticity, the relative frequency of card usage, and the competitive condition of merchants in the determination of network fee payments. To accomplish this, two scenarios are analyzed; first, a network with homogeneous banks that serve both sides of the payment market, therefore acquiring and issuing cards in an equal manner and second, financial institutions that exclusively serve as either issuers or acquirers. The model yielded two significant results. First, similar to the Langlet (2009) case of unitary payment networks, the consumer price elasticity, the relative frequency of card usage, and the competitive condition of merchants were found to determine the prices of the multi-party payment system. Second, limiting the interchange fee is found to be efficient in regulating the inefficiently high merchant usage fees.

A summarized version of this working paper is forthcoming in Lydian Payments Journal.

Keywords: Payment cards, Interchange fee, Merchant discount, Payment systems, Credit card associations, Two-sided markets, Platform pricing, No surcharge rule, Network externalities

JEL Classification: L11, G21, D53

Suggested Citation

Langlet, Markus, Multi-Party Payment Card Network Pricing Determination of Merchant and Interchange Fee (June 3, 2010). European Business School Research Paper No. 09-18, Available at SSRN: https://ssrn.com/abstract=1514292 or http://dx.doi.org/10.2139/ssrn.1514292

Markus Langlet (Contact Author)

EBS Universität für Wirtschaft und Recht - EBS Business School ( email )

Gustav-Stresemann-Ring 3
65189 Wiesbaden, Hessen
Germany

Robert Bosch GmbH ( email )

Germany

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