Abstract
A number of jurisdictions are considering imposing price caps on the interchange fees that card issuers receive from merchant acquirers when cardholders pay with their cards. Several have already done so. This paper examines the net impact of these price caps on consumers. The economics of pass-through predicts that issuers would pass on some of their lost revenues to consumers in the form of higher fees while merchants would pass on some of their reduced costs to consumers in the form of lower prices. The net impact depends on the relative magnitude of these two effects. While the answer depends on the parameters for the particular jurisdiction that is imposing the caps, this paper shows that there are asymmetries between the issuer and merchant side that are likely to result in consumers incurring greater costs from increased fees than they obtain in lower costs from merchants thereby resulting in a loss of consumer welfare. Banks are likely to have higher pass-through rates than merchants so that the long-run impact on bank fees is greater than on merchant prices. While the analysis is general we pay particular attention to the situation in the European Union.
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