This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. American Economic Review
  4. June 2011
  5. Why Do Payment Card Networks Charge Proportional Fees?

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Why Do Payment Card Networks Charge Proportional Fees?

  • Oz Shy
  • Zhu Wang
American Economic Review
vol. 101, no. 4, June 2011
(pp. 1575–90)
Download Full Text PDF

Abstract

This paper explains why payment card networks charge fees that are proportional to the transaction values instead of charging fixed per-transaction fees. We show that, when card networks and merchants both have market power, card networks earn higher profits by charging proportional fees. It is also shown that competition among merchants reduces card networks' gains from using proportional fees relative to fixed per-transaction fees. Merchants are found to earn lower profits under proportional fees, whereas consumer utility and social welfare are higher. Our welfare results are then evaluated with respect to the current regulatory policy debates. (JEL E42, G21, G28)

Citation

Shy, Oz, and Zhu Wang. 2011. "Why Do Payment Card Networks Charge Proportional Fees?" American Economic Review, 101 (4): 1575–90. DOI: 10.1257/aer.101.4.1575

JEL Classification

  • E42 Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
  • G21 Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
  • G28 Financial Institutions and Services: Government Policy and Regulation