The Effects of Price Controls on Payment-Card Interchange Fees: A Review and Update - International Center for Law & Economics
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The Effects of Price Controls on Payment-Card Interchange Fees: A Review and Update

INTRODUCTION

Over the past 20 years, the ways we pay for goods and services have undergone a revolution. There has been a dramatic shift away from the use of cash and checks and toward the use of payment cards. More recently, this shift has also migrated toward the use of online payments, mobile payments and, to a smaller degree, cryptocurrency. These shifts, demonstrated in Figure 1, have been driven by innovations in payments technologies that have made them quicker, more convenient, more secure, and less costly for both consumers and merchants. And it has continued over the past two years, despite the global COVID-19 pandemic; indeed, the pandemic accelerated the shift to contactless and online payments.[1]

At the same time, governments have intervened in the operation of payment systems in various ways. As we have documented previously, these regulations have typically slowed the shift toward more innovative, quicker, more convenient payment systems, while also reducing other benefits and harming, in particular, poorer consumers and smaller merchants.[2]

Figure 1: Shares of Non-Cash Payments in the US by Transaction Volume, 2000 – 2020

Source: Authors’ calculations based on data from the Federal Reserve Payment Studies

This literature review revisits and builds upon our previous assessments, incorporating data, analyses, and insights from more recent research. The review is organized as follows. Section I provides a brief overview of the theory of two-sided markets as it pertains to payment-card networks, the role of the interchange fee as a balancing mechanism, and the theory of the optimal interchange fee. Section II describes some of the major ways that jurisdictions have capped interchange fees and posits some hypotheses regarding the likely effects of such caps. Sections III to VIII consider evidence for and against those hypotheses. Section IX concludes.

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[1] See Developments in Noncash Payments for 2019 and 2020: Findings from the Federal Reserve Payments Study, Federal Reserve Board, (December 2021), available at https://www.federalreserve.gov/publications/files/developments-in-noncash-payments-for-2019-and-2020-20211222.pdf, and the various previous studies and associated data, https://www.federalreserve.gov/paymentsystems/frps_previous.htm.

[2] See Todd J. Zywicki, The Economics of Payment Card Interchange Fees and the Limits of Regulation, International Center for Law and Economics, ICLE Financial Regulatory Program White Paper Series, (Jun. 2, 2010), available at http://laweconcenter.org/images/articles/zywicki_interchange.pdf; Todd J. Zywicki, Geoffrey A. Manne, & Julian Morris, Unreasonable and Disproportionate: How the Durbin Amendment harms Poorer Americans and Small Businesses, International Center for Law and Economics (Apr. 25, 2017); Todd J. Zywicki, Geoffrey A. Manne, & Julian Morris, Price Controls On Payment Card Interchange Fees: The U.S. Experience, George Mason Law & Economics Research Paper No. 14-18, (Jun. 6, 2014).

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