Abstract
The paper presents a model of a payment card association which provides payment cards as well as ATM services. Consumers are able to substitute cards by cash and regard cash as an inferior substitute for a debit card. I analyze the role of some widely accepted interchange agreements, such as the no-surcharge rule and collectively set interchange fees in this enriched setup. In the absence of ATM interchange fees banks-members of an association tend to set too high merchant discount causing a bias toward overprovision of card services. Introduction of ATM interchange fees makes provision of ATM services profitable, and may result in the excessive equilibrium share of cash payments and the over-optimal level of ATM quality. The effect of banning the no-surcharge rule is ambiguous.
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