This paper examines the possible impact on innovation involving payment cards as a result of price caps that lead to significant reductions in interchange fees. Drastic reductions including proposals for zero interchange fees invert the traditional business model for the payments card industry from a merchant-pays model to a consumer-pays model while smaller reductions skew the pricing structure towards consumers. The paper argues that moving away from a merchant pays model is likely to reduce the overall level of innovation in the industry, divert innovation away from the role of payments in transactions and towards improvements for which consumers can be charged non-transaction related fees, and discourage the entry of new payment systems.
Payment Innovation and Interchange Fees Regulation: How Inverting the Merchant-Pays Business Model Would Affect the Extent and Direction of Innovation
By Global Economics Group on July 20, 2011