Declined at the Border: How Interchange Price Controls Disrupt Cross-Border Commerce
Executive Summary
Payment-card networks are two-sided platforms that create value by connecting cardholders and merchants. Interchange fees—the small amounts retained by cardholders’ banks when payment cards are used—serve as balancing payments that help optimize participation on both sides of the market. Networks therefore set differentiated interchange fees that vary by card type, transaction channel, merchant category, geography, and whether the transaction is domestic or cross-border. Those differences reflect real variation in cost, fraud risk, demand, and transaction value.
Many governments have imposed price controls on interchange fees, compressing those differentials and impairing networks’ ability to balance the two sides of the market. The consequences are well documented: reduced card rewards, higher cardholder or account fees, higher interest margins, limited pass-through of merchant savings to consumers, and diminished investment in payment innovation. Consumers bear much of the harm, but merchants may suffer as well.
This issue brief focuses on a less-studied effect: the application of interchange-fee caps to cross-border card payments. Cross-border transactions are costlier and riskier than domestic transactions because they involve higher fraud rates, currency-conversion costs, cross-jurisdictional compliance, and more complex processing and settlement. When regulators apply caps calibrated to domestic conditions to foreign-card transactions, they create a mismatch between issuer revenue and issuer cost.
That mismatch can lead issuers to tighten authorization criteria, increasing the likelihood that legitimate cross-border transactions will be declined. Industry evidence showing materially lower authorization rates for cross-border payments than for domestic ones is consistent with that mechanism.
The harm is especially acute for high-value tourism spending and cross-border e-commerce. Both depend heavily on cards, including credit and premium cards, and both involve transaction types that carry higher fraud and authorization risks. Cross-border interchange caps therefore threaten not only issuer economics, but also consumers’ ability to transact and merchants’ ability to complete sales. The paper concludes that policymakers should exempt cross-border transactions from interchange-fee-cap regimes or, at minimum, adopt separate, higher caps that reflect the genuine incremental costs those transactions impose.
I. Interchange-Fee Regulation and Cross-Border Distortions
Payment cards are integral to modern economies. Over the past several decades, card networks have transformed how consumers buy goods and services, replacing cash and checks with faster, safer, and more convenient electronic payments. The growth of cross-border e-commerce and international travel has extended that transformation across national borders, making payment cards a central medium for international consumer transactions.
Governments around the world have increasingly intervened in the pricing of payment-card services by imposing price controls on interchange fees—the small amounts retained by cardholders’ banks when consumers use payment cards. Regulators typically justify these caps by claiming that interchange fees are “too high” and that lower fees would benefit merchants and, ultimately, consumers. The economic literature shows why that claim is incomplete at best.[1]
Payment-card networks are two-sided platforms that serve both cardholders and merchants. Platform efficiency and welfare depend not only on the total level of fees, but also on how those fees are allocated between the two sides of the market.[2] Interchange fees operate as balancing payments, enabling networks to subsidize participation on the more price-sensitive side—typically cardholders—while recovering more of the system’s costs from the side with less elastic demand.[3]
The theoretically optimal interchange fee varies across jurisdictions, card types, merchant categories, transaction channels, and domestic versus cross-border transactions. Those differences reflect variation in fraud risk, demand elasticities, issuer costs, regulatory obligations, and the value each side derives from network participation. In practice, network-set interchange fees can only approximate the optimal schedule. But rigid price controls make that approximation worse. A cap calibrated for domestic debit-card transactions at grocery stores is unlikely to fit cross-border credit-card transactions at hotels. No regulator has the information needed to set the right fee for every transaction type.
This informational problem has both static and dynamic consequences. Interchange-fee caps compress differentiated fee schedules, distort the allocation of costs and benefits between merchants and cardholders, and predictably induce issuers to recover lost revenue through reduced rewards, higher account fees, and diminished cardholder benefits. They also weaken incentives to invest in fraud detection, tokenization, real-time authorization infrastructure, and other payment technologies that are especially important for cross-border transactions. And when caps apply unevenly across network models, they can distort competition by pushing consumers, merchants, and fintech firms toward less-regulated products or organizational forms.
This issue brief focuses on a dimension of interchange-fee regulation that has received too little attention: the application of interchange-fee caps to cross-border transactions. Cross-border card payments are inherently more costly and risky than domestic payments. They involve higher fraud rates, currency-conversion costs, additional processing and settlement costs, and compliance with multiple regulatory regimes. When regulators calibrate interchange caps to domestic cost structures, they create a systematic mismatch between the revenue issuers receive and the costs they bear on cross-border transactions.
That mismatch grows when the caps apply to transactions by foreign cardholders whose issuers operate under cost structures, fraud environments, and competitive conditions different from those the regulator considered. At the margin, the predictable result is more declines of legitimate cross-border transactions—a prediction consistent with industry evidence showing materially lower authorization rates for cross-border payments than for domestic ones.
A. Interchange Fees Reflect Transaction Differences
Payment networks do not set a single, uniform interchange fee. Instead, they maintain complex fee schedules that vary across multiple dimensions, including card type (debit versus credit, standard versus premium, consumer versus commercial), transaction channel (point-of-sale versus online, card-present versus card-not-present), merchant category, and whether the transaction is domestic or cross-border. These distinctions reflect differences in costs, risks, and demand conditions across transaction types.
The distinction between debit and credit cards illustrates the point. Interchange fees fund a range of cross-side subsidies—benefits provided to cardholders and financed, in part, by merchant-paid fees. For credit cards, those subsidies include rewards programs, such as cashback, points, and miles; the interest-free grace period between purchase and repayment; and issuers’ assumption of default and collection risk.
For debit cards, interchange revenue has historically funded rewards programs and enabled banks to offer free or low-cost checking accounts to consumers with lower balances. In effect, interchange revenue cross-subsidizes account holders who might otherwise be unprofitable to serve. When governments impose price controls on debit-card interchange fees, banks often respond by curtailing rewards programs, increasing checking-account fees, and raising minimum-balance requirements for free accounts.[4]
Credit-card transactions generally impose higher costs on issuers than debit-card transactions because they involve extending credit, guaranteeing zero liability for fraud, and providing more substantial cardholder benefits. Credit-card interchange fees therefore tend to exceed debit-card interchange fees. Premium and commercial cards typically carry even higher fees because they offer enhanced benefits, such as travel insurance and extended payment terms, that attract high-spending cardholders whose transactions merchants especially value.
Cross-border transactions also typically carry higher interchange fees than domestic transactions. That differential reflects measurable cost differences. Cross-border transactions involve currency-conversion risk, higher fraud rates, compliance with multiple regulatory regimes, and additional processing and settlement costs. Higher interchange fees compensate issuers for those incremental costs and help ensure that networks can authorize transactions that might otherwise be uneconomic to process.
B. Price Controls Distort Interchange-Fee Structures
When regulators impose interchange-fee price controls, they compress the differentiated fee structures that payment networks have developed to balance costs and incentives across heterogeneous transaction types. The European Union’s Interchange Fee Regulation (IFR), for example, caps consumer debit-card interchange fees at 0.20% and consumer credit-card interchange fees at 0.30% of transaction value for both domestic and intra-European Economic Area (EEA) cross-border transactions.[5] Those caps sit far below pre-regulation interchange fees, which ranged from roughly 0.5% to more than 2%, depending on card type, jurisdiction, and transaction characteristics. Most important for present purposes, the IFR eliminates the cross-border differential.
The core problem is informational. Regulators cannot know the “optimal” interchange fee because it depends on variables that differ across jurisdictions, card types, merchant categories, and transaction channels. Payment networks have spent decades refining interchange-fee schedules to account for those differences. Price controls—and especially rigid caps—replace that flexible system with an arbitrary ceiling. Any fee above the cap disappears, limiting networks’ ability to calibrate fees to differing transaction conditions.
The problem becomes more acute in cross-border transactions. A price control designed around domestic conditions in one country may roughly reflect that country’s costs, competitive dynamics, and consumer preferences. Applying the same cap to transactions involving foreign cardholders creates a larger mismatch. Foreign issuers operate under different cost structures, face different fraud risks, and serve consumers with different spending patterns. In many cases, the regulated fee will fall below both the issuer’s domestic interchange rate and the higher costs associated with cross-border authorization and settlement.
Economic models of payment networks as two-sided markets underscore these risks. Rong Ding and Julian Wright, for example, analyze interchange fees in a framework that allows platforms to differentiate pricing across merchants and jurisdictions.[6] They find that restricting such differentiation through a single interchange fee can reduce welfare because it removes an important mechanism for aligning prices with heterogeneous costs and benefits. Price controls do not necessarily eliminate fee differentiation altogether, although very low caps may do so. Even where some differentiation remains, however, price controls substantially constrain networks’ ability to price efficiently and are therefore likely to generate the distortions Ding and Wright identify.
The theoretical literature also predicts compensating behavior throughout the payments ecosystem. Because issuing banks depend in part on interchange revenue, price controls predictably lead them to adjust other prices and expenditures. Banks may increase annual card fees, reduce rewards, scale back insurance and ancillary benefits, or reduce investment in innovation.[7]
The empirical evidence strongly supports those predictions. In our 2022 review paper, Geoffrey Manne, Todd Zywicki, and I document that, in every jurisdiction that has imposed interchange-fee price controls—including the European Union, Australia, Spain, and the United States—issuing banks responded with some combination of reduced card rewards, higher annual card fees, increased checking-account fees, and higher interest margins. At the same time, merchants generally did not meaningfully pass through their savings to consumers.[8]
C. Price Controls Reduce Incentives to Innovate
Interchange-fee price controls do more than reallocate costs between cardholders and merchants. They also affect long-term investment and innovation in payment systems. Interchange revenue funds not only cardholder rewards, but also issuer investments in fraud detection, tokenization, real-time authorization infrastructure, and other technologies that benefit both sides of the market.[9] When regulators compress that revenue, issuers have fewer resources and weaker incentives to invest in such improvements.
Several important payment-card technologies emerged specifically to address cross-border transaction problems and may not have been developed absent the ability to monetize those investments through interchange revenue. For example:
- The EMV chip standard was developed in significant part to improve cross-border interoperability.[10]
- EMV 3-D Secure, a machine-learning-enhanced fraud-detection and prevention system, was developed largely in response to elevated cross-border fraud risks.[11]
- Dynamic Currency Conversion—which allows cardholders to view and pay for purchases in their home currency—was designed specifically for cross-border transactions.[12]
Markus Reisinger and Hans Zenger show that interchange caps set at the level of the “tourist test”—the point at which a hypothetical merchant is indifferent between accepting a card payment or cash—produce investment levels below the social optimum.[13] Such caps fail to account for the dynamic benefits of innovation financed by interchange revenue. In our review paper, we similarly document slower investment in payment technologies in jurisdictions that imposed interchange-fee price controls.[14]
Price controls also redirect innovation toward regulatory arbitrage rather than consumer welfare, security, speed, or product quality. The Durbin Amendment illustrates the point. The law capped debit-card interchange fees only for issuers with more than $10 billion in assets, while exempting smaller issuers. That structure created a regulatory wedge.
Despite possessing greater scale, infrastructure, compliance capacity, and data resources, covered banks became less attractive partners for fintech firms because interchange caps limited their ability to recover investments in product development, rewards, fraud prevention, and customer acquisition. Fintech firms therefore structured new debit-card and banking products through partnerships with smaller, Durbin-exempt banks, which could sustain higher interchange revenue than comparable programs issued by covered institutions.
The result was a distortion in both the direction and organization of innovation. Entrepreneurs and investment capital flowed toward exempt-charter structures and product designs that preserved interchange economics, rather than toward the partnerships or technologies that otherwise would have been most efficient, secure, or valuable to consumers.
These innovation effects are especially important in cross-border transactions, where fraud-prevention and real-time authorization costs are highest. If interchange revenue cannot sustain continued investment in those systems, the quality and security of cross-border payment processing will deteriorate over time. That dynamic would compound the direct effects of fee compression on authorization rates.
D. Price Controls Distort Payment-Network Competition
Interchange-fee price controls can shift demand across payment networks, in addition to compressing issuer revenue. Where regulators primarily cap four-party schemes, consumers who value rewards programs and premium-card benefits have incentives to migrate toward less-regulated alternatives, especially three-party cards, where those benefits remain more sustainable.
Australia provides a useful example. Following the country’s initial interchange-fee reforms, three-party cards and companion-card arrangements gained market share. That share later declined after regulators extended comparable restrictions to American Express companion-card structures.[15] The European Union saw a similar pattern. Under the IFR, co-branded American Express products initially enjoyed a relative advantage over regulated four-party schemes. That advantage narrowed after the European Court of Justice held in 2018 that certain co-branded and agent-issued three-party products also fell within the interchange-cap regime.[16]
The broader implication is that interchange-fee price controls distort not only pricing, but also competition among network models. As the Durbin Amendment experience illustrates, such regulation encourages substitution toward less-regulated products and organizational forms, rather than competition based on efficiency, security, or consumer value.
II. Cross-Border Transactions Carry Higher Costs and Risks
Cross-border card payments have grown rapidly with international tourism and e-commerce, but they remain inherently more costly and risky than domestic transactions. They involve currency-conversion and exchange-rate risk, overlapping regulatory and anti-money-laundering obligations, more complex settlement procedures, and substantially higher fraud exposure.
Those differences matter for interchange regulation. Caps calibrated to domestic conditions are unlikely to cover the higher costs of foreign-card transactions, increasing the risk that issuers will decline legitimate cross-border payments at the margin.
A. Cross-Border Card Payments Have Expanded Rapidly
Cross-border card payments have grown rapidly alongside the expansion of international tourism and e-commerce—and, in many respects, have helped enable both. The Federal Reserve reports that, in 2022, U.S.-issued cards were used for 7.5 billion cross-border transactions totaling $470 billion, while foreign-issued cards were used for 2.7 billion transactions in the United States totaling $180 billion.[17] Globally, Visa reported 15% growth in cross-border volume in fiscal year 2025 across 258 billion total transactions, while Mastercard reported 18% growth in cross-border volume across 175 billion switched transactions.[18] Together, these figures reflect the continued expansion of international card usage.
Figure 1 shows that global outbound cross-border card volume has more than tripled over the past decade.
FIGURE 1: Global Outbound Cross-Border Card Volume
SOURCE: Author’s estimate (see note for details)[19]
B. Cross-Border Transactions Carry Higher Fraud Costs
Cross-border card transactions impose several costs beyond those associated with domestic payments, including currency-conversion and exchange-rate risk, compliance with multiple regulatory and anti-money-laundering regimes, and more complex settlement procedures. Fraud, however, is the single largest additional cost driver. Multiple authoritative data sources show that fraud rates on cross-border card transactions substantially exceed domestic fraud rates, although the scale of the disparity varies across jurisdictions.
European Union. The disparity is especially pronounced in the euro area. The European Central Bank’s 2023 report on card fraud in the Single Euro Payments Area (SEPA) found that, between 2016 and 2021, cross-border transactions accounted for only 10% to 11% of total card-transaction value, but generated 63% to 65% of total fraud losses by value.[20] The joint ECB-European Banking Authority 2025 Report on Payment Fraud suggests that those proportions have remained similar or may have increased.[21]
Australia. AusPayNet data for 2024 show total card fraud losses of A$899 million, of which A$495.5 million—roughly 55%—involved Australian-issued cards used overseas. Card-not-present (CNP) fraud accounted for A$454 million of those overseas losses. Fraud involving foreign-issued cards used in Australia added another A$87 million.[22]
These data show that cross-border card transactions generate fraud costs several times higher than domestic transactions on a per-transaction basis. An interchange-fee cap calibrated to domestic fraud costs will therefore tend to undercompensate issuers for cross-border transactions, creating incentives to restrict authorization of higher-risk foreign transactions.
III. Fee Caps Can Increase Cross-Border Declines
The preceding sections establish two key points: Interchange fees help balance two-sided payment markets, and the efficient fee varies by card type, transaction channel, and geography. Cross-border transactions also carry higher costs than domestic transactions, especially fraud costs.
This section connects those points to transaction authorization. When regulators cap interchange fees for cross-border transactions, they compress the revenue issuers use to offset higher fraud, compliance, currency-conversion, and settlement costs. That mismatch can make marginal cross-border transactions uneconomic to approve, especially in card-not-present channels, higher-risk merchant categories, and transactions involving unfamiliar foreign acquirers.
The result is predictable: Issuers have stronger incentives to tighten authorization criteria, increasing the risk that legitimate cross-border transactions will be declined. Industry evidence showing materially lower authorization rates for cross-border payments is consistent with that mechanism.
A. Fee Compression Can Reduce Authorization Incentives
Each time a cardholder attempts a purchase, the issuing bank must decide in real time whether to authorize the transaction. Authorization means accepting potential fraud liability, funding the transaction in the case of credit cards, and bearing the processing costs of clearing and settlement. The issuer’s incentive to approve the transaction depends on whether expected marginal revenue—principally the interchange fee—exceeds expected marginal cost. If it does, authorization has a positive expected return. If not, the issuer faces a marginal loss.
For domestic transactions, local issuers can adapt to price-controlled interchange fees by adjusting other fees and expenses. Cross-border transactions are different. Fraud costs are several times higher than domestic levels, and issuers typically set interchange fees based on their own domestic conditions plus an additional amount to cover cross-border liabilities. A price control set by a foreign jurisdiction will therefore often fall short of the issuer’s costs.
The European Union illustrates the problem. The IFR caps interchange fees at 0.20% for debit cards and 0.30% for credit cards. Yet the European Central Bank’s 2021 data—the most recent comparable data available—show that cross-border transactions accounted for roughly 11% of card-transaction value but 63% of fraud losses by value.[23] That implies an average fraud-loss rate for cross-border transactions roughly 14 times that of domestic transactions. A 0.30% interchange fee on a €100 cross-border credit-card transaction yields only €0.30, which must cover elevated fraud risk, currency-conversion costs, cross-jurisdictional compliance, international settlement complexity, and cardholder benefits such as rewards and insurance.
One likely issuer response is to tighten authorization criteria for transactions where the shortfall is greatest: cross-border transactions, especially card-not-present transactions, higher-risk merchant categories, and purchases involving unfamiliar foreign acquirers. The issuer cannot recover the lost interchange revenue from the merchant, with whom it has no direct relationship. Nor can it easily recover the shortfall from the cardholder at the point of sale. In the short run, the issuer’s only realistic margin of adjustment is the authorization decision itself.
Over time, issuers may also seek to recover lost revenue through other channels, including annual fees, interest charges, and reduced cardholder benefits.
B. Cross-Border Transactions Face Higher Decline Rates
No public dataset isolates the specific contribution of interchange-fee caps to cross-border decline rates—a gap in the empirical literature that warrants further study. But industry evidence consistently shows that cross-border transactions face substantially higher decline rates than domestic transactions. Payment processors and gateway aggregators regularly report materially higher authorization rates for domestic payments than for cross-border payments.[24]
Several factors drive that gap. Higher fraud risk on cross-border transactions triggers more conservative issuer-authorization algorithms. Currency mismatches between the cardholder’s home currency and the transaction currency can raise flags in automated fraud-detection systems. Issuer unfamiliarity with foreign acquirers and merchants can also reduce the confidence score assigned to a transaction.
Interchange-fee caps intensify these pressures. When caps compress the interchange revenue available to offset the higher costs of cross-border authorization, the issuer’s expected return on marginal cross-border transactions turns negative earlier in the risk distribution. As a result, transactions that would have been authorized under market-determined interchange fees may be declined under a capped regime. All else equal, jurisdictions that cap interchange fees should therefore see a wider authorization gap between domestic and cross-border transactions than jurisdictions that do not.
Research by Checkout.com and Oxford Economics found that merchants lose between 1% and 2.1% of revenue to false declines—legitimate transactions that issuer fraud-screening systems erroneously reject—and that cross-border payment complexity exacerbates the problem.[25]
IV. Tourism and E-Commerce Bear the Heaviest Costs
The costs of cross-border interchange-fee caps do not fall evenly. They are most likely to affect transactions where issuer costs, fraud risk, and transaction values are highest—especially tourism spending and cross-border e-commerce.
Both categories rely heavily on card payments, including credit and premium cards, and often involve either foreign-card-present or card-not-present transactions. Those are precisely the transactions most vulnerable to tighter authorization standards when interchange-fee caps compress issuer revenue.
The result is more than a marginal inconvenience. In tourism, false declines can disrupt travel, cost merchants high-value sales, and damage the customer experience. In e-commerce, they can translate into significant lost commerce, with smaller merchants likely bearing a disproportionate share of the burden.
A. Tourism Depends on Reliable Cross-Border Payments
The U.N. World Tourism Organization estimates that global tourism receipts reached $1.6 trillion in 2024.[26] Surveys suggest that tourists strongly prefer card payments, which offer greater convenience and lower risk than cash.[27] Except for domestic tourists, travelers with local bank accounts, or transactions acquired in the cardholder’s home jurisdiction—such as prepaid hotel bookings—tourism-related card payments are generally cross-border transactions.
Higher-value tourism spending often occurs on credit cards, including premium cards that offer rewards, no foreign-transaction fees, travel protections, and purchase protection.[28] When interchange-fee price controls apply to those transactions, they reduce issuers’ ability to recover the higher costs associated with international payments, including fraud risk, cross-jurisdictional compliance, and settlement complexity. Intra-European Economic Area transactions offer the clearest example because the EU’s IFR subjects them to the same caps as domestic transactions. The likely effect is not that every such transaction becomes uneconomic, but that margin compression increases pressure to tighten authorization for higher-risk transactions at the margin.
That friction falls directly on tourists, who are more likely to experience card declines, and on tourism-dependent merchants, who lose sales and may suffer reputational harm from the poor customer experience associated with declined transactions.
Given consumers’ strong preference for using cards abroad, a large share of the roughly $1.6 trillion in annual tourism spending likely occurs through card payments. Even a modest increase in decline rates would therefore translate into billions of dollars in lost commerce.
The welfare loss is likely larger for premium-card holders, who are disproportionately high spenders and thus among the tourists whose spending generates the greatest economic benefit. A declined $2,000 hotel booking or $500 restaurant bill imposes a much greater economic loss than a declined $20 transit fare.
B. E-Commerce Magnifies the Costs of False Declines
In 2024, eMarketer projected that global retail e-commerce would reach $7.5 trillion in 2026.[29] UNCTAD, meanwhile, estimated that cross-border transactions accounted for 25% of retail e-commerce in 2019. If that share remains similar, cross-border e-commerce would total roughly $1.9 trillion.[30]
A very large share of those transactions are card-not-present (CNP) payments, which carry inherently higher fraud risk and trigger more conservative issuer-authorization policies. The European Central Bank reports that CNP fraud accounted for €1.28 billion of the €1.53 billion in total euro-area card fraud in 2021.[31] Online fraud losses have also risen rapidly: Juniper Research estimates that global e-commerce fraud losses grew from $17.5 billion in 2020 to $56 billion in 2025, a compound annual growth rate of more than 26%.[32]
When interchange-fee caps reduce the revenue issuers receive for authorizing CNP cross-border transactions, while fraud costs continue to rise, issuers rationally tighten authorization standards. That means accepting fewer marginal transactions where the fraud probability is elevated. The result is a higher decline rate in cross-border e-commerce, where every transaction is simultaneously CNP, cross-border, and subject to interchange-fee compression.
With cross-border e-commerce valued at roughly $1.9 trillion, even small increases in decline rates caused by interchange-fee compression would represent substantial losses in foregone commerce.
These losses also have distributional consequences. Smaller merchants, which often lack the technical sophistication to deploy advanced fraud-prevention tools or maintain relationships with multiple acquirers, are likely to face higher decline rates than large platforms that can negotiate bespoke authorization arrangements.
V. Policy Implications and Recommendations
The evidence assembled here points to several conclusions with direct policy relevance.
First, the differentiated structure of interchange fees is not merely an artifact of market power. It reflects the heterogeneous costs, risks, and demand characteristics of different transaction types. Uniform caps compress those differences and remove a key instrument of efficient price discrimination in two-sided markets, with predictable negative consequences for transaction volume and welfare.
Second, cross-border interchange-fee caps impose costs that differ in kind and scale from domestic price controls. Higher fraud rates, currency-conversion costs, and regulatory-compliance burdens make cross-border transactions more expensive to authorize and settle. Caps applied to those transactions are therefore likely to do greater harm than domestic caps, including by increasing decline rates and harming both consumers and merchants.
Cross-border caps may also distort competition among network models. Four-party card issuers—such as Visa and Mastercard issuing banks—may respond by reducing jurisdiction-specific benefits on affected transactions, including rewards accrual, fee waivers, or approval rates. Those changes could make capped-jurisdiction transactions less attractive to cardholders and increase the relative appeal of less-regulated three-party products, such as American Express and Discover.
Third, policymakers should pay particular attention to the disproportionate impact on high-value tourism and e-commerce transactions. Tourism provides a critical source of foreign-exchange earnings for many economies, and payment frictions directly reduce tourist spending. Cross-border e-commerce expands market integration and consumer access to global goods and services. Regulatory interventions that impede these transactions impose costs well beyond the payment system itself.
Fourth, policymakers considering interchange-fee regulation should exempt cross-border transactions or, at minimum, establish separate and higher caps that reflect the cost differences documented here. The European Union’s decision to apply the same cap to intra-EEA cross-border transactions as to domestic transactions—while leaving extra-EEA transactions uncapped—creates an incoherent regime. It penalizes intra-European trade while failing to address the higher costs of transactions involving non-EEA cards.
Fifth, regulators should proceed cautiously before extending interchange-fee caps to card types or transaction categories that remain unregulated. The U.S. experience with the Durbin Amendment shows that even a narrowly targeted debit-card cap can produce significant distortions. Extending caps to credit cards, as some legislative proposals would do, would compress the remaining unregulated margin that helps the system absorb the costs of premium services, fraud prevention, and cross-border processing.
VI. Conclusion
Interchange fees are the critical balancing mechanism in two-sided payment-card markets. Their differentiated structure—varying by card type, transaction channel, merchant category, and geography—reflects real differences in cost, risk, and demand across heterogeneous transactions. Price controls that compress those differences impair that balancing function, with especially serious consequences for cross-border payments.
This issue brief has shown that cross-border card transactions carry higher costs and face higher decline rates than domestic transactions. The gap between capped interchange fees and the actual cost of cross-border processing creates systematic pressure on issuers to tighten authorization standards, particularly for higher-risk transactions. These are not abstract welfare losses. They mean real purchases not made, real sales not completed, and real tourists and online shoppers denied the seamless payment experience modern card networks were built to provide.
Put differently, price controls on cross-border interchange fees become, at the margin, restrictions on cross-border commerce. They function as a form of de facto export restriction on suppliers of export-oriented consumer goods and tourism services.
They also create cross-border transfers with no democratic mandate. Issuers that authorize transactions subject to foreign price-controlled interchange fees effectively transfer value to acquiring banks—and perhaps indirectly to merchants—in the regulating jurisdiction, at the expense of their own cardholders. That dynamic raises the risk of retaliation by jurisdictions whose issuing banks are subject to foreign interchange caps.
The contagion risk is compounded by regulatory benchmarking. Once some jurisdictions cap cross-border interchange, other regulators may treat those controlled rates as evidence of the “market” level. That can produce a downward ratchet divorced from the heterogeneous costs of fraud, compliance, settlement, card type, merchant category, and transaction channel.
If such tit-for-tat responses spread, the consequences for cross-border credit-card payments could be severe. A single jurisdiction’s cap may induce issuers to absorb losses at the margin, impose destination-specific foreign-transaction fees, tighten authorization rules, or reduce cardholder benefits. If many jurisdictions follow suit, the result would not be a series of isolated local transfers. It would be a cumulative erosion of the global revenue base that funds cross-border card acceptance, fraud prevention, travel benefits, and reliable authorization.
Under those conditions, issuers would have stronger incentives to deny marginal transactions, impose destination-specific fees, withdraw premium benefits in capped jurisdictions, or steer cardholders toward less-regulated payment channels. The apparent local saving would come at the cost of a less reliable and less innovative cross-border payments system, with losses borne not only by issuers and cardholders, but also by the merchants that depend on high-value tourism and cross-border e-commerce.
The evidence strongly supports treating cross-border interchange-fee caps as a particularly costly form of price control. Regulators seeking to reduce merchant costs should consider alternatives—such as enhanced transparency requirements, tax incentives, interoperable real-time payment systems, or other programs to encourage digital-payments adoption and acceptance—that do not artificially compress the interchange-fee differentials on which efficient two-sided card markets depend.
At minimum, regulators should explicitly carve cross-border transactions out of any interchange-fee-cap regime or subject them to separate, higher caps that reflect the genuine incremental costs those transactions impose.
[1] Julian Morris, Todd Zywicki & Geoffrey Manne, The Effects of Price Controls on Payment-Card Interchange Fees: A Review and Update, Int’l Ctr. for L. & Econ. (2022), https://laweconcenter.org/wp-content/uploads/2022/03/Payments-2021-Lit-Review.pdf; Jean-Charles Rochet & Jean Tirole, Platform Competition in Two-Sided Markets, 1 J. Eur. Econ. Ass’n 990 (2003).
[2] Julian Wright, Optimal Card Payment Systems, 47 Eur. Econ. Rev. 587 (2003).
[3] A large body of economic literature—beginning with Baxter’s seminal 1983 contribution and later developed by Rochet and Tirole, Wright, and others—shows that, when payment networks set interchange fees, those fees generally reflect each side’s relative costs and demand elasticities. William F. Baxter, Bank Interchange of Transactional Paper: Legal and Economic Perspectives, 26 J.L. & Econ. 541 (1983); Jean-Charles Rochet & Jean Tirole, Two-Sided Markets: A Progress Report, 37 RAND J. Econ. 645 (2006).
[4] Morris, Zywicki & Manne, supra note 1, at 8–15 (documenting the decline in debit-card rewards and free checking after interchange-fee caps). See also Todd J. Zywicki, Geoffrey A. Manne & Julian Morris, Price Controls on Payment Card Interchange Fees: The U.S. Experience, Mercatus Ctr., George Mason Univ., Working Paper No. 14-18 (2014), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2446080; Vladimir Mukharlyamov & Natasha Sarin, Price Regulation in Two-Sided Markets: Empirical Evidence from Debit Cards, J. Fin. Econ. (2025), https://www.sciencedirect.com/science/article/pii/S0304405X25001023.
[5] Regulation (EU) 2015/751 of the European Parliament and of the Council of Apr. 29, 2015, on Interchange Fees for Card-Based Payment Transactions, arts. 3–4 [hereinafter IFR], https://eur-lex.europa.eu/eli/reg/2015/751/oj/eng.
[6] Rong Ding & Julian Wright, Payment Card Interchange Fees and Price Discrimination, 65 J. Indus. Econ. 39 (2017).
[7] Wright, supra note 2; Julian Wright, The Determinants of Optimal Interchange Fees in Payment Systems, 52 J. Indus. Econ. 1 (2004); Richard Schmalensee, Payment Systems and Interchange Fees, 50 J. Indus. Econ. 103 (2002).
[8] Morris, Zywicki & Manne, supra note 1, at 3–5.
[9] Julian Morris, The Hidden Wealth of Payment Cards: How Innovations in Payments Transform Society, Truth on the Mkt. (Dec. 19, 2024), https://truthonthemarket.com/2024/12/19/the-hidden-wealth-of-payment-cards-how-innovations-in-payments-transform-society.
[10] EMVCo, Overview of EMVCo, https://www.emvco.com/about-us/overview-of-emvco (last visited Apr. 20, 2026).
[11] EMVCo, EMV® 3-D Secure, https://www.emvco.com/emv-technologies/3-d-secure (last visited Apr. 20, 2026).
[12] Mastercard, Dynamic Currency Conversion (DCC) Performance Guide—Merchant Edition (Nov. 11, 2024), https://www.mastercard.com/content/dam/mccom/shared/business/support/rules-pdfs/DCC-Guide-2025-Merchant-Version.pdf.
[13] Markus Reisinger & Hans Zenger, Interchange Fee Regulation and Service Investments, 66 Int’l J. Indus. Org. 40 (2019), https://www.sciencedirect.com/science/article/abs/pii/S0167718719300311.
[14] Morris, Zywicki & Manne, supra note 1.
[15] Reserve Bank of Austl., Payments System Board Annual Report 2016, at 19 (2016); Reserve Bank of Austl., Payments System Board Annual Report 2020, at 17 (2020). See also Julian Morris, Todd J. Zywicki & Geoffrey A. Manne, The Effects of Price Controls on Payment-Card Interchange Fees: A Review and Update 30–31, Int’l Ctr. for L. & Econ. (2022); Julian Morris, Geoffrey A. Manne, Ian Lee & Todd J. Zywicki, Punishing Rewards: How Clamping Down on Credit Card Interchange Fees Can Hurt the Middle Class 22–23, Macdonald-Laurier Inst. (Nov. 2017).
[16] Case C-304/16, Am. Express Co. v. Lords Comm’rs of Her Majesty’s Treasury, ECLI:EU:C:2018:66, ¶¶ 53–61 (Feb. 7, 2018); Press Release No. 12/18, Court of Justice of the Eur. Union, A Three Party Card Scheme Involving a Co-Branding Partner or an Agent Is Subject to the Same Restrictions as Those Applicable to Four Party Schemes with Respect to Interchange Fees (Feb. 7, 2018).
[17] Bd. of Governors of the Fed. Reserve Sys., The Federal Reserve Payments Study: 2024 Update (Nov. 2024), https://www.federalreserve.gov/paymentsystems/2024-November-The-Federal-Reserve-Payments-Study.htm.
[18] Visa Inc., Annual Report for Fiscal Year 2025 (2025); Mastercard Inc., Supplemental Operational Performance 2023Q4–2025Q4 (2026).
[19] The 2024 figure is anchored to Datos Insights’ estimate that global outbound cross-border card volume reached $4 trillion in 2024, up 21% year over year. Earlier figures are back-cast using the average of Visa’s constant-dollar cross-border-volume growth and Mastercard’s local-currency cross-border-volume growth as an industry proxy. The network universe follows Nilson’s global brand-card universe: Visa, UnionPay, Mastercard, American Express, JCB, and Discover/Diners Club. This is not an audited all-network time series.
[20] European Central Bank, Report on Card Fraud in 2020 and 2021 6 (2023), https://www.ecb.europa.eu/pub/pdf/cardfraud/ecb.cardfraudreport202305~5d832d6515.en.pdf (last visited Apr. 9, 2026) [hereinafter ECB Card Fraud Report].
[21] European Banking Authority, 2025 Report on Payment Fraud, EBA-REP-2025-40, at 11 (2025) (while the report does not provide precise figures, the bar chart in Chart 1a suggests the trend continued).
[22] AusPayNet, Payment Fraud Statistics: 1 January 2024–31 December 2024 (2025), https://www.auspaynet.com.au/resources/fraud-statistics.
[23] ECB Card Fraud Report, supra note 20, at 15.
[24] See, e.g., Worldpay, How To Accept Payments Internationally, https://www.worldpay.com/en/insights/articles/how-to-accept-payments-internationally (last visited Apr. 20, 2026).
[25] Checkout.com & Oxford Economics, High-Performance Payments: The Hidden Billion-Dollar Opportunity 6, 10 (2023) (finding that merchants lose 1–2.1% of revenue to false declines, with cross-border complexity serving as a key driver).
[26] U.N. World Tourism Org., World Tourism Barometer, Vol. 23, No. 1 (2025).
[27] Discover Global Network, 3 Travel Payment Trends Shaping the Way Travelers Spend in 2025 (2025) (reporting that most consumers planned to use credit cards (68%) and debit cards (52%), rather than cash, for personal travel expenses, and that 46% of travelers sometimes, often, or always abandon purchases when merchants do not accept their preferred credit card); Tim Zawacki, Travel Perks Continue to Drive Premium Credit Card Uptake, Survey Finds, S&P Glob. Mkt. Intel. (Apr. 12, 2022) (reporting survey evidence that 52% of annual-fee credit-card holders identified travel-related perks as the cards’ most important feature); American Express, 2025 Global Travel Trends Report 4 (2025) (reporting that 66% of global respondents said combining credit-card rewards with other loyalty benefits provides “the best value for international trips,” and that 61% of surveyed Millennials and Gen Z use credit cards to maximize travel rewards).
[28] See Visa Inc., How Travel Trends Are Reshaping Global Payments (2023), https://corporate.visa.com/en/sites/visa-perspectives/trends-insights/how-travel-trends-are-reshaping-global-payments.html (noting that payment cards are the most commonly used payment method for international travel); Mastercard, Inside the Wealthy’s Playbook: How the Affluent Are Mastering Their Money (2024), https://www.mastercard.com/news/ap/en-hk/newsroom/press-releases/en-hk/2024/inside-the-wealthy-s-playbook-how-the-affluent-are-mastering-their-money-with-financial-gymnastics (observing that affluent consumers disproportionately use credit cards for high-value and overseas purchases); American Express, Global Travel Trends Report (2023), https://www.americanexpress.com/en-au/travel/discover/get-inspired/global-travel-trends-en-au (reporting that consumers value credit-card rewards and benefits in international travel); see also JPMorgan Chase & Co., Chase Sapphire Reserve® Card Benefits, https://creditcards.chase.com/rewards-credit-cards/sapphire/reserve; American Express, Platinum Card® Benefits, https://www.americanexpress.com/us/credit-cards/card/platinum (describing travel-related benefits, including no foreign-transaction fees, travel insurance, and purchase protection).
[29] Arielle Feger, Worldwide Ecommerce Sales to Break $6 Trillion, Make Up a Fifth of Total Retail Sales, eMarketer (Mar. 19, 2024), https://www.emarketer.com/content/worldwide-ecommerce-sales-break-6-trillion.
[30] U.N. Conf. on Trade & Dev. (UNCTAD), Estimates of Global E-Commerce 2019 and Preliminary Assessment of COVID-19 Impact on Online Retail 2020, Technical Note on ICT for Development No. 18 (2021), https://unctad.org/system/files/official-document/tn_unctad_ict4d18_en.pdf (estimating that cross-border transactions accounted for 25% of retail e-commerce).
[31] ECB Card Fraud Report, supra note 20, at 6.
[32] Juniper Research, Press Release, Fraudulent E-Commerce Transactions to Surpass $131bn by 2029 (Feb. 3, 2025).