Last updated November 8, 2022

Issue Spotlight: Two-Sided Markets

The Issue

When buyers and sellers use a platform, broker, or other intermediary to exchange offers to buy or sell goods and services, we say that this market is “two-sided.” Recognizing that a market is two-sided has vital implications for antitrust analysis and can drastically alter the competitive appraisal of a case. Due to the complex dynamics unique to two-sided markets, conduct that may appear anticompetitive when the effects on only one set of customers is considered may prove to be entirely consistent with—and actually promote—healthy competition when the effects on both sides are examined.


In the early 2000s, industrial organization economists realized that users of a platform often have interdependent demands. Two-sided markets connect these distinct sets of users.

Software platforms are a prime example. A consumer’s valuation of a software operating system generally depends on the number and quality of developers that write apps for it, and vice versa. Other examples include newspapers, video-game consoles, shopping malls, social-network platforms, and search engines.

To be viable, these platforms generally require a critical mass of users on each side of the market. This is often achieved by subsidizing elastic users on one side and making inelastic users on the other side bear more of the platform’s costs. Credit-card rewards programs are one example of this. Platforms may also decide how different groups of users interact, in ways that might be more favorable to a given constituency, and thus likely to attract such users. The privacy labels introduced by Apple and Google on their app stores are a notable example.

The First Priority of Antitrust Analysis is Getting It Right, Not Making it Easier

Excess is unflattering, no less when claiming that every evolution in legal doctrine is a slippery slope leading to damnation. In Friday’s New York Times, Lina Khan trots down this alarmist path while considering the implications for the pending Supreme Court case of Ohio v. American Express. One of the core issues in the case is the proper mode of antitrust analysis for credit card networks as two-sided markets. The Second Circuit Court of Appeals agreed with arguments, such as those that we have made, that it is important to consider the costs and benefits to both sides of a two-sided market when conducting an antitrust analysis. The Second Circuit’s opinion is under review in the American Express case.

Read the full piece here.


What might initially appear to be a rather straightforward finding actually has tremendous implications for antitrust policy.

This is particularly the case when it comes to market definition. Because prices on one side of the market affect usage on the other, two-sided markets should be analyzed as a single market with two interdependent sides, rather than as two independent markets. As the U.S. Supreme Court found in the seminal Ohio v American Express case, “the key point is that it is wrong as a matter of economics to ignore significant demand interdependencies among the multiple platform sides” when defining markets. 

Ignoring these two-sided dynamics will yield incorrect assessments. For instance, conduct that increases prices on one side of the market may be seen as anticompetitive, despite increasing the total output when both sides of the market are accounted for. Because one side typically subsidizes the other, evidence of a price increase on one side is not necessarily consistent with increased market power and anticompetitive behavior.

Amicus Brief, Ohio v. American Express


While the three-step burden-shifting framework for evaluating antitrust cases under the rule of reason is conceptually well-accepted and understood, case law remains unclear regarding what suffices to satisfy each party’s burden at each of the three stages. This case offers the Court an opportunity both to clarify what constitutes harm to competition and to explain the nature of the shifting burdens in rule of reason analysis.

In their merits briefing, rather than offer tools for providing structure to the rule of reason, Petitioners urge the Court to adopt an amorphous standard that would permit plaintiffs to satisfy their burden without evidence of durable market power— and even without direct proof of anticompetitive effects as the term is traditionally and properly understood in Section 1 jurisprudence. Acquiescing to Petitioners’ vague conception of a plaintiff’s prima facie burden would untether antitrust law from rigorous economic analysis and harm consumers by increasing significantly the risk of error in lower courts. This would leave litigants with little to no certainty regarding what evidence they should introduce, let alone what evidence a court would find persuasive in any given case, and no clarity as to what businesses can and cannot do.

Without an approach to establishing plaintiff’s burden disciplined by economic analysis and proof, the balance of false positive (Type I) and false negative (Type II) errors—which is critical to proper adjudication of the antitrust laws—would be thrown off keel. The fundamental goal of antitrust law is to foster consumer welfare by enhancing or increasing output in a relevant market. Output is the touchstone of antitrust analysis because a dominant firm’s ability to constrain market-wide output is what allows it to anticompetitively raise prices and harm consumers. Petitioners’ approach, however, would flip this analysis on its head and allow price effects to dictate results, thereby permitting courts to ignore output effects—the sine qua non of antitrust analysis—in ascertaining whether a plaintiff satisfied its prima facie burden.

Such a result is contrary to this Court’s precedent and particularly problematic here. This Court has recognized that vertical restraints might “[increase prices] in the course of promoting procompetitive effects.” Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 895-96 (2007) (citing Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 728 (1988)). And modern economics provides no basis for assuming that a demonstration of price effects on only one side of a two-sided market accurately represents the market-wide effects of a course of conduct. Rather, economics predicts that market-wide welfare might increase, decrease, or remain neutral given price effects on a single side. Only an analysis of the market as a whole can illuminate the true competitive implications.

This brief explains amici’s understanding of the relevant economic analysis. It explains why basic economic principles underlying the analysis of multi-sided markets lead to the conclusion that a plaintiff should be required to demonstrate, at a minimum, that: (1) the allegedly unlawful restraint caused anticompetitive effects in the form of actual or probable restricted output market-wide—a showing that logically requires analyzing both sides of a two-sided market; and (2) the defendant had sufficient market power to restrict output in a properly defined market. These two requirements align with sound economics and would also provide clear guidance for courts in applying the rule of reason.

Amicus Brief


Some commentators and policymakers argue that open platforms are inherently superior to closed ones from a social-welfare perspective, and that some degree of interoperability or platform “openness” should therefore be mandated across digital platforms such as app stores, in-app payment services, and mobile-operating systems.

But a proper understanding of the two-sided markets literature undermines such assertions. All too often, these criticisms ignore the opposing effects that a practice may have on both sides of the market.

For example, closed mobile ecosystems like Apple’s iOS can increase user adoption thanks to improved safety features or a more curated experience, even though they might limit the number of developers on the other side of the platform. Narrowly focusing on one side of a two-sided market may obscure these complex dynamics and lead to wrongful antitrust convictions.

ICLE Brief for 9th Circuit in Epic Games v Apple

United States Court of Appeals
For the
Ninth Circuit

Plaintiff/Counter-Defendant, Appellant/Cross-Appellee,
Defendant/Counter-Claimant, Appellee/Cross-Appellant

Appeal from a Decision of the United States District Court
for the Northern District of California,
No. 4:20-cv-05640-YGR ? Honorable Yvonne Gonzalez Rogers





The International Center for Law & Economics (“ICLE”) is a nonprofit, non- partisan global research and policy center aimed at building the intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law & economics methodologies to inform public policy debates and has longstanding expertise in the evaluation of antitrust law and policy.

Amici also include 26 scholars of antitrust, law, and economics at leading universities and research institutions around the world. Their names, titles, and academic affiliations are listed in Addendum A. All have longstanding expertise in, and copious research on, antitrust law and economics.

Amici have an interest in ensuring that antitrust promotes the public interest by remaining grounded in sensible legal rules informed by sound economic analysis. Amici believe that Epic’s arguments deviate from that standard and promote the private interests of slighted competitors at the expense of the public welfare.


Epic challenges Apple’s prohibition of third-party app stores and in-app payments (“IAP”) systems from operating on its proprietary, iOS platform as a violation of the antitrust laws. But, as the district court concluded, Epic’s real concern is its own business interests in the face of Apple’s business model—in particular, the commission charged for the use of Apple’s IAP system. See Order at 1-ER22, Epic Games, Inc. v. Apple Inc., No. 4:20-CV-05640 (N.D. Cal. Sept. 10, 2021), ECF No. 812 (1-ER3–183). In essence, Epic is trying to recast its objection to Apple’s 30% commission for use of Apple’s optional IAP system as a harm to consumers and competition more broadly.

Epic takes issue with the district court’s proper consideration of Apple’s procompetitive justifications and its finding that those justifications outweigh any anticompetitive effects of Apple’s business model. But Epic’s case fails at step one of the rule of reason analysis. Indeed, Epic did not demonstrate that Apple’s app distribution and IAP practices caused the significant market-wide effects that the Supreme Court in Ohio v. Am. Express Co. (“Amex”) deemed necessary to show anticompetitive harm in cases involving two-sided transaction markets. 138 S. Ct. 2274, 2285–86 (2018). While the district court found that Epic demonstrated some anticompetitive effects, Epic’s arguments below focused only on the effects that Apple’s conduct had on certain app developers and failed to appropriately examine whether consumers were harmed overall. This is fatal. Without further evidence of the effect of Apple’s app distribution and IAP practices on consumers, no conclusions can be reached about the competitive effects of Apple’s conduct.

Nor can an appropriate examination of anticompetitive effects ignore output. It is critical to consider whether the challenged app distribution and IAP practices reduce output of market-wide app transactions. Yet Epic did not seriously challenge that output increased by every measure, and Epic’s Amici ignore output altogether.

Moreover, the district court examined the one-sided anticompetitive harms presented by Epic, but rightly found that Apple’s procompetitive justifications outweigh any purported anticompetitive effects in the market for mobile gaming transactions. The court recognized that the development and maintenance of a closed iOS system and Apple’s control over IAP confers enormous benefits on users and app developers.

Finally, Epic’s reliance on the theoretical existence of less restrictive alternatives (“LRA”) to Apple’s business model is misplaced. Forcing Apple to adopt the “open” platform that Epic champions would reduce interbrand competition, and improperly permit antitrust plaintiffs to commandeer the judiciary to modify routine business conduct any time a plaintiff’s attorney or district court can imagine a less restrictive version of a challenged practice, irrespective of whether the practice promotes consumer welfare. See NCAA v. Alston, 141 S. Ct. 2141, 2161 (2021) (“[C]ourts should not second-guess ‘degrees of reasonable necessity’ so that ‘the lawfulness of conduct turn[s] upon judgments of degrees of e?ciency.’”). Particularly in the context of two-sided platform businesses, such an approach would sacrifice interbrand, systems-level competition for the sake of a superficial increase in competition among a small subset of platform users.

Read the full brief here.

Amicus Brief

Making Sense of the Google Android Decision

The European Commission’s recent Google Android decision will go down as one of the most important competition proceedings of the past decade. Yet, in-depth reading of the 328-page decision leaves attentive readers with a bitter taste. The problem is simple: while the facts adduced by the Commission are arguably true, the normative implications it draws—and thus the bases for its action—are largely conjecture.

This paper argues that the Commission’s decision is undermined by unsubstantiated claims and non sequiturs, the upshot of which is that the Commission did not establish that Google had a “dominant position” in an accurately defined market, or that it infringed competition and harmed consumers. The paper analyzes the Commission’s reasoning on questions of market definition, barriers to entry, dominance, theories of harm, and the economic evidence adduced to support the decision.

Section I discusses the Commission’s market definition It argues that the Commission produced insufficient evidence to support its conclusion that Google’s products were in a different market than Apple’s alternatives.

Section II looks at the competitive constraints that Google faced. It finds that the Commission wrongly ignored the strong competitive pressure that rivals, particularly Apple, exerted on Google. As a result, it failed to adequately establish that Google was dominant – a precondition for competition liability under article 102 TFEU.

Section III focuses on Google’s purported infringements. It argues that Commission failed to convincingly establish that Google’s behavior prevented its rivals from effectively reaching users of Android smartphones. This is all the more troubling when one acknowledges that Google’s contested behavior essentially sought to transpose features of its rivals’ closed platforms within the more open Android ecosystem.

Section IV reviews the main economic arguments that underpin the Commission’s decision. It finds that the economic models cited by the Commission poorly matched the underlying fact patterns. Moreover, the Commission’s arguments on innovation harms were out of touch with the empirical literature on the topic.

In short, the Commission failed to adequately prove that Google infringed European competition law. Its decision thus sets a bad precedent for future competition intervention in the digital sphere.

ICLE White Paper


Payment-card networks are prime examples of two-sided markets. If too few merchants accept a particular form of payment, consumers are unlikely to opt for that platform, and vice versa. In this context, network operators assess “interchange fees,” paid by merchants on one side of the platform in order to subsidize cardholders on the other side of the platform. In turn, this increases the number of transactions taking place on the platform, which benefits both merchants and cardholders. 

Efforts to cap these interchange fees may therefore harm the very consumers that policymakers purport to protect. The absence of interchange fees impose a loss on issuing banks that will then be passed on to consumers in the form of higher interest rates and lower cardholders rewards, among other costs.

There is a Vast Literature Discussing These Implications

And ICLE Scholars Have Written Extensively on this Topic

Regulating Routing in Payment Networks


Imagine you are at the grocery-store checkout line and it is to pay. You enter your credit card in the terminal, assuming that your payment will be routed over the network operated by the brand on your card (typically Visa or Mastercard). But you learn after the fact that the grocery store has chosen instead to route it over China Union Pay.

Most of us would be uncomfortable ceding to the merchant the authority to route transactions over the cheapest network, without considering our concerns about security, reliability, and other card features (including rewards). Yet that is already the case for many point-of-sale transactions made with debit cards—the result of a 2011 regulation implemented by the Federal Reserve. Consumers can, however, often still force the transaction to run over their preferred network by pushing the “credit” button.

But new rules under consideration by the Federal Reserve would extend merchants’ ability to determine how debit transactions are routed to online transactions, while also making it more difficult for consumers to control who gets to handle their personal data and process their transactions.[1] Perhaps more worryingly, a new bill (the “Credit Card Competition Act”) introduced by Sen. Richard Durbin (D-Ill.) would, in the name of “competition,” impose similar routing requirements on credit cards, while ignoring important differences in the competitive framework of debit and credit cards.[2]

Since they emerged more than 50 years ago, payment-card networks have come to play an increasingly important role in our lives, both directly and indirectly. Directly, they facilitate hundreds of billions of transactions every year, representing tens of trillions of dollars in value.[3] Indirectly, they have contributed to a near-complete shift from paper-based to electronic value exchange and accounting in the United States and many other countries. This has, in turn, resulted in enormous efficiency improvements and wider social benefits, such as the development of online commerce, greater ease of travel, and reduced tax avoidance.[4]

The shift from paper to electronic value exchange has been driven almost entirely by voluntary decisions made by businesses and consumers. Despite such clear evidence of market success, over the past three decades, governments have increasingly sought to correct alleged “market failures” in payment-card markets. The main tool governments have used is price controls on interchange-fee rates. More recently, however, several governments—including the United States, the European Union, and Australia—have sought to reduce rates further still by regulating the manner in which payments are “routed” (i.e., the way that messages pertaining to a transaction are sent between the merchant and the issuing bank). This has important implications for consumer protection, fraud prevention, and financial inclusion.

In previous studies, we have shown that regulation of interchange fees typically has slowed the shift to more innovative, quicker, more convenient payment systems, while also reducing other benefits and particularly harming poorer consumers and smaller merchants.[5]

Prohibitions on exclusivity in routing have similar effects as direct price controls. But imposed routing requirements will have additional effects that go beyond those of price controls and would result in various harms to consumers and the economy. This study seeks to delve deeper into the problem, focusing primarily on the justifications for and effects of regulations that affect the way in which transactions are routed. While “routing” may seem arcane, it is fundamental to the effectiveness of payment networks. Understanding the likely consequences of such regulation is thus important. That is the purpose of this paper.

We begin, in Section II, by describing the technological and economic elements of payment-card routing. Supporters of forced routing requirements contend that they will promote more efficient competition in consumers’ payment-card usage. But we show that this superficial argument ignores the basic economic realities of payment-card networks, as well as the fundamentally different nature of consumer competitive choice, both in debit-card markets (where routing requirements currently exist) and in credit-card markets (the intended target of Sen. Durbin’s proposed law). Section III reviews the evidence regarding the effects of regulating payment networks. We summarize the pernicious effects of price controls and then explain how the routing mandate created by the 2011 Federal Reserve regulation, known as Regulation II, has had similar effects. Section IV considers the proposed changes to Regulation II and the new Durbin proposal to regulate credit-card routing, with a particular focus on the likely harmful effects of the changes on the incidence of fraud and the knock-on effects on issuers, cardholders, and merchants. Section V concludes.

[1] Debit Card Interchange Fees and Routing, FR 26189 (2021), available at:

[2] Credit Card Competition Act of 2022, S. 4674, 117th Cong. § 2 (2022), available at:

[3]  Global Network Card Results in 2021, Nilson Report Issue 1224,

[4] See the appendix to this paper and references therein.

[5] See Todd J. Zywicki, The Economics of Payment Card Interchange Fees and the Limits of Regulation, ICLE Financial Regulatory Program White Paper Series (Jun. 2, 2010), available at; Todd J. Zywicki, Geoffrey A. Manne, and 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, and 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).

ICLE White Paper

Regulating Payment-Card Fees: International Best Practices and Lessons for Costa Rica

Executive Summary

In 2020, the Legislative Assembly of Costa Rica passed Legislative Decree 9831, which granted the Central Bank of Costa Rica (BCCR) authority to regulate payment-card fees. BCCR subsequently developed a regulation that set maximum fees for acquiring and issuing banks, which came into force Nov. 24, 2020. In BCCR’s November 2021 ordinary review of those price controls, the central bank set out a framework to limit further the fees charged on domestic cards and to introduce limits on fees charged on foreign cards.

This brief considers the international experience with interchange and acquisition fees, reviewing both theoretical and empirical evidence. It finds that international best practices require that payment networks be considered dynamic two-sided markets, and therefore, that assessments account for the effects of regulation on both sides of the market: merchants and consumers. In contrast, BCCR’s analysis focuses primarily on static costs that affect merchants, with little attention to the effects on consumers, let alone the dynamic effects. Consequently, BCCR’s proposed maximum interchange and acquisition fees would interfere with the efficient operation of the payment-card market in ways that are likely to harm consumers. Specifically, losses by issuing and acquiring banks are likely to be passed on to consumers in the form of higher banking and card fees, and less investment in improvements. Less wealthy consumers are likely to be hit hardest.

Based on the evidence available, international best practices entail:

  • As far as possible, allowing the market to determine interchange fees and acquisition fees;
  • Acknowledging that payment networks are two-sided markets in which one side (usually merchants) typically subsidizes the other side, thereby increasing system effectiveness;
  • Not benchmarking fees, especially against countries that have price controls in place; and
  • Not imposing price controls on fees on foreign cards.

Read the full issue brief here.

ICLE Issue Brief

The Effects of Price Controls on Payment-Card Interchange Fees: A Review and Update


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.1F[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.2F[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.


Early card payments involved only two parties: the merchant and the consumer. The “card” (a metal plate) enabled merchants to maintain a record of credit provided to regular customers, who would then settle-up at the end of the month.3F[3] In the 1950s, first Diners Club and then American Express established “three-party” systems, which enabled consumers to use the same card at multiple different merchants.4F[4] In a three-party system, the card issuer pays merchants directly and bills and collects from cardholders directly.5F[5]

During the 1960s, several organizations developed “four-party” systems. As their designation suggests, these systems, typified by those operated by Mastercard and Visa, have four main parties: issuer, consumer, merchant, and acquirer. The issuer contracts with the consumer, providing the card, issuing bills, etc. The acquirer contracts with the merchant, making payment. The rules of the system are set by the network operator, which also facilitates settlement between issuer and acquirer, and monitors for fraud and other abuse.6F[6]

A.   Two-Sided Markets

One of the main challenges faced by any payment system is to persuade both merchants and consumers of its value, regardless of whether it is a three-party or four-party payment card system or some other payment mechanism such as cash, check, or cryptocurrency. If too few merchants accept a particular form of payment, consumers will have little reason to hold it and issuers will have little incentive to issue it. Likewise, if too few consumers hold a card, merchants will have little reason to accept it. Conceptually, economists describe such situations as “two-sided markets”: consumers are on one side, merchants on the other, and the payment system acts as the platform facilitating interactions between them.7F[7] While payment cards are a prominent example of a two-sided market, there are many others, including: newspapers, shopping malls, social-networking sites, and search engines. Indeed, the rise of the Internet has made two-sided markets practically ubiquitous.

All platform operators that facilitate two-sided markets face essentially the same challenge: how to incentivize participation on each side to maximize the joint net benefits of the platform to all participants—and to allocate costs accordingly.8F[8] Thus, the platform operator can be expected to set the respective prices charged to participants on each side of the market to achieve this maximand.9F[9] If the operator sets the price too high for some consumers, they will be unwilling to use the platform; similarly, if the operator sets the price too high for some merchants, they will not be willing to use the platform.

This balancing is not static, but evolves over time in light of changes in costs, benefits, and preferences. Thus, whereas checks were once ubiquitous, now they are rarely used in retail payments, in large part because of their inconvenience and the risk to the merchant that a check will not clear. Similarly, while grocery stores and fast-food chains traditionally eschewed payment cards, their declining costs and increased speed and convenience facilitated faster throughput of the retail experience. Change may come from exogenous forces as well—for example, the COVID-19 pandemic led to a dramatic surge in the use of electronic payments and payment cards, as consumers and merchants sought to avoid physical cash and face-to-face interactions.

Nonetheless, platforms must cover the system operating costs, which arise from the joint interaction of the two sets of participants, mediated by the platform. In the case of payment networks, marginal costs are incurred only if boththe consumer and the merchant choose to interact through the platform.10F[10] Because the costs of operating the network arise from the joint interaction of participants on both sides, there is no “natural” way to allocate them.11F[11] Ultimately, the costs of operating the platform must be covered either by merchants or by consumers, or by some combination of the two.12F[12]

In many cases, this involves one side paying more of the costs than the other side. Consider newspapers, for example, where advertisers are on one side of the market and consumers on the other. Newspapers publish stories to attract readers. While some of the costs of operating a newspaper may come from reader’s payments, often much and sometimes all of the costs are covered by advertisers. Participants on one side of the market, the advertisers, thus effectively subsidize the production of content that is of interest to participants on the other side of the market, the readers. Likewise, search engines return searches that are of interest to consumers while also displaying advertisements (that may be related to the search or to some other activity the searcher has been undertaking), with the revenue from the advertisements funding the (non-advertising related) search returns.

In addition to these cross-subsidies across the two sides of the market (from merchants to consumers), there are also often cross-subsidies among the participants on one side of the market, such as between business and consumer users of a platform service. The Portable Document Format standard (PDF) is a good example: Adobe supplies the PDF-reader software for free, while charging businesses that want to produce PDFs.

In general, the costs of operating the platform tend to fall on the party who is least sensitive to such costs—in the language of economics, the party with the lower price elasticity. In the case of newspapers and search engines, that is advertisers. In the case of payment cards, it is merchants.13F[13]

Thus, it is predictable that the costs of payment-card transactions would gravitate to merchants to cover much of the cost of each transaction. Through this transaction fee, merchants often pay not only all the costs of operating the network but also effectively subsidize participation by consumers, e.g., through rewards programs.  Consumers may also pay an annual fee, although this is rare today, except for cards that offer rewards such as airline miles for which the annual fee defrays the costs of operating the rewards program.

B.   Interchange Fees

In three-party networks, the merchants’ transaction fee is charged directly by the network operator. In four-party systems, merchants pay acquirers a “merchant discount” (known as the “merchant service charge” in some jurisdictions), which includes the acquirer’s processing costs and the “interchange fee.” The interchange fee is a charge made by the network operator, the bulk of which is paid to the issuer (in the form of a deduction from the amount sent by the issuer to the acquirer when settling the transaction).

The various three- and four-party payment networks have been engaged in a decades-long process of dynamic competition in which each has sought—and continues to seek—to discover how to maximize value to their networks of merchants and consumers. This has involved considerable investment in innovative products, including more effective ways to encourage participation, as well as the identification and prevention of fraud and theft. As one of us previously noted:

[Compared to in-house providers of credit,] card issuers have developed the capacity to assess and price risk more accurately, giving them an increased ability both to take on more risk and to allocate the cost of risk within the system. For example, because they draw from a wider array of retailers, card-holders and locations, general credit card issuers can develop more-sophisticated (and less-costly) systems for anticipating and preventing fraudulent practices, reducing the risk of default by particular consumers, or protecting consumers against identity theft. In light of the massive volume of transactions processed and the number of consumers in the system, it has become feasible for card issuers to take increasingly-sophisticated measures to minimize (or appropriately charge for) the risk of non-payment by cardholders. Likewise, this huge database of information has enabled issuers to learn how to attack fraud through effective devices like password authorization, additional digits for card number verification, and special protections for on-line sales. Card issuers deploy extraordinarily-complicated neural networks and intelligent computer systems to detect changing patterns of fraud in real-time. Very few of these protections would be cost-feasible for department store chains (much less supermarkets, small appliance, hardware, or convenience stores), and large-scale card issuers are able to extend affordable credit to a much wider population and to do so much more efficiently. Indeed, these protections represent a traditional economy of scale, the benefits of which redound to both consumers and merchants.14F[14]

It has also involved experimentation with different levels of transaction fees. The early three-party schemes charged a transaction fee of as much as 7%.15F[15] Competition and innovation (including, especially, innovation in measures to reduce delinquency, fraud, and theft) drove those rates down. For U.S. credit cards, the merchant discount rate currently ranges from about 1.5% to 3%.16F[16] Rates vary by industry (for example, lower-margin industries, such as fast food and grocery stores, often have lower rates) and card-not-present transactions typically have higher interchange-fee rates because of higher incidences of fraud associated with them. (The specific rate depends on numerous factors, including the type of merchant and the type of arrangement the merchant has with the acquirer.)17F[17]

The majority of the merchant discount is the interchange fee remitted to the issuing bank, which in the United States ranges from about 1.5% to 3.5% (except for debit cards, subject to the caps discussed below) and averages approximately 2.2%.18F[18] Interchange-fee revenue covers many of the costs of operating the system, such as attracting new customers, card issuance, customer service, and fraud prevention and resolution, as well as such benefits as rewards, fraud protection, and car-rental insurance. Moreover, these services are offered for free today (no annual fee) or even at a negative price, such as when rewards are provided. Finance charges on revolving balances also generate substantial revenue, much of which covers the costs of underwriting, servicing, and charge-offs on credit balances. Revenue provided by interchange fees has risen substantially over time as a percentage of revenues from operations, increasing from 10% in 1990 to more than 20% in 2010, primarily mirroring a decline in the percentage of revenues generated by finance charges and the fact that transaction use (where the card balance is paid in full every month) grew more rapidly than revolving use.19F[19]

C.   What Does Economic Theory Say About Optimal Interchange Fees?

Beginning with William Baxter’s seminal 1983 paper, a rich theoretical literature has sought to understand various aspects of how payment networks operate. This literature has uncovered numerous valuable insights, including:

  • The interchange fee exists as a default in open-network schemes, at least in part, because of the high costs of negotiating and enforcing many bilateral agreements between banks.20F[20]
  • The interchange fee is set by payment-network operators, thereby internalizing the external costs that would arise if individual issuing banks set their own fees, as individual banks would have an incentive to set their fees excessively high to try to maximize their own revenue without regard to the impact on the value of the system as a whole.21F[21]
  • As noted, the optimal allocation of costs between merchants and consumers depends on the price elasticity of the participants on each side of the market.22F[22] And since merchants tend to be less price sensitive, they generally bear more of the cost (via the merchant discount rate, which includes the interchange fee and merchant-acquirer fees), though consumers often also bear some of the cost (for example, in the form of annual fees, which tend to be applied to cards targeted at less price-sensitive consumers).

These factors, in combination with others, mean that the “optimal” interchange fee is indeterminate a priori and varies from place to place and from time to time. The European Commission has noted similarly:

The Commission does not dispute in general that payment systems are characterised by indirect network externalities and that in theory a revenue transfer between issuing and acquiring banks may help optimise the utility of the network to its users. However, whether a collectively fixed interchange fee should flow from acquirers to issuers or vice versa, and at which level it should be set cannot be determined in a general manner by economic theory alone, as theories always rely on assumptions that may not sufficiently reflect market reality.23F[23]

The U.S. Supreme Court put it more succinctly:

To optimize sales, the network must find the balance of pricing that encourages the greatest number of matches between cardholders and merchants.24F[24]

Given the theoretical indeterminacy of the optimal interchange fee, economists have cautioned against intervention unless there is evidence of a significant market failure.25F[25]


In the three decades since Denmark introduced the first caps on interchange fees in 1990, dozens of jurisdictions have followed suit.26F[26] This section summarizes, in A through D, some of the most significant interchange-fee caps that have been introduced in various jurisdictions, namely Spain, Australia, the United States, and the European Union. It then offers some hypotheses regarding the likely effects of such caps.

A. Spain

Spain’s government twice imposed caps on interchange fees through “agreements” between merchant associations and payment-card schemes.27F[27] The first of these was initiated by the competition authority in April 1999, with a cap of 3.5% coming into effect in July of that year and falling in increments of 0.25% per year until it reached 2.75% in July 2002. This first agreement expired in July 2003.

The second cap was introduced in December 2005 by the Ministry of Finance, Industry, Tourism and Trade, again though an “agreement” between merchant associations and card schemes. The caps came into effect in January 2006 and lasted for five years. These caps were much tighter than those in the previous agreement, as can be seen in the schedule in Table I.

Table 1: Maximum Interchange Fees in Spain Under the ‘Agreement’ Signed in 2005
2006 2007 2008 2009-2010
Euros (€) Credit (%) Debit (€) Credit (%) Debit (€) Credit (%) Debit (€) Credit (%) Debit (€)
0-100 mil. 1.40 0.53 1.30 0.47 1.10 0.40 0.79 0.35
100-500 mil. 1.05 0.36 0.84 0.29 0.63 0.25 0.53 0.21
> 500 mil. 0.66 0.27 0.66 0.25 0.54 0.21 0.45 0.18

Source: Iranzo, et al., 2012, at 14

B.   Australia

In 2002, Australia’s bank regulator, the Reserve Bank of Australia (RBA), introduced a series of regulations affecting the processing of credit-card transactions, including limits on interchange fees charged by four-party card networks. The RBA also prohibited card networks from enforcing restrictions on surcharges.

Under the rules, which came into force in 2003, interchange fees were not subject to an absolute cap but rather were subject to an effective cap set using a “cost-based framework.” Under the framework, a “cost-based measure” was calculated as the total of the eligible costs for each scheme in the preceding year, divided by the value of transactions processed by the scheme during the period. Meanwhile, eligible costs were limited to:

(i) issuers’ costs incurred principally in processing credit card transactions, including the costs of receiving, verifying, reconciling and settling such transactions;

(ii) issuers’ costs incurred principally in respect of fraud and fraud prevention in connection with credit card transactions;

(iii) issuers’ costs incurred principally in providing authorization of credit card transactions; and

(iv) issuers’ costs incurred in funding the interest-free period on credit card transactions, calculated using the average of the cash rate published by the Reserve Bank of Australia over the three financial years prior to the date by which the cost-based benchmark must be calculated.28F[28]

Notably, these eligible costs did not include any cross-subsidies, such as for rewards programs.

In a media release issued Aug. 27, 2002, the RBA noted that “average interchange fees in Australia are expected to fall from around 0.95 per cent of the value of each credit card transaction at present to around 0.55–0.6 per cent in the second half of 2003 – a reduction of around 40 per cent.”29F[29]

The cost-based framework meant that different card schemes were subject to somewhat different effective caps. In February 2005, the RBA launched an inquiry to assess the potential to introduce uniform caps. Following the inquiry, the RBA introduced a common standard in November 2005, under which all cards would be subject to the same caps.30F[30]Under the standard, the caps were calculated based on the weighted average costs across the covered card networks, using the same eligible-cost framework as above.31F[31]

Three-party cards were not originally subject to the regulation. In 2005, the RBA considered but rejected the possibility of regulating three-party cards that had partnered with banks.32F[32]

In February 2006, the RBA changed the rules regarding interchange fees for the domestic debit system—EFTPOS, for “electronic funds transfer at point of sale”—introducing both a floor and a ceiling on EFTPOS transactions.33F[33] At the same time, it prohibited Visa and Mastercard from enforcing their “honor all cards” rules with respect to debit transactions; i.e., if a merchant accepted Visa (Mastercard) credit, then Visa (Mastercard) could no longer require the merchant to accept Visa (Mastercard) debit.

On Sept. 29, 2006, the RBA set a common benchmark (average interchange fee) for Visa and Mastercard of A$0.5 per transaction, to apply for the three years following Nov. 1, 2006.34F[34] In December 2008, the RBA decided to waive the three-year review, so the A$0.5 per-transaction benchmark continued to apply.35F[35]

In 2016, the RBA changed “Standard No. 1,” under which interchange and other credit-card fees were determined.36F[36] Among other things, it set a hard cap of 0.8% per transaction and a maximum average rate of 0.5% over the course of a “reference period.” It also specified that issuers were prohibited from receiving “net compensation” in relation to credit-card transactions.

C.   The United States

In 2010, the United States passed legislation to impose caps on interchange fees on debit-card transactions made using cards issued by banks with more than $10 billion in assets. The caps, imposed under Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act—a section titled “Reasonable Fees and Rules for Payment Card Transactions,” but better known as the “Durbin amendment” after its sponsor, Sen. Richard Durbin (D-Ill.)—required the Federal Reserve Board to set maximum interchange fees for covered banks that are “reasonable and proportional to the cost incurred by the issuer with respect to the transaction.”37F[37] On July 20, 2011, the Fed Board issued its ruling, known as Regulation II, which capped fees for covered transactions at $0.21 plus 0.05% of the transaction value.38F[38] In a separate rulemaking, the Fed Board determined that an additional $0.01 per transaction may also be charged to defray the cost of investments related to identifying and preventing fraud and suspicious transactions.39F[39]

Regulation II came into effect in October 2011 and the consequences were both immediate and dramatic: average interchange fees for covered debit transactions fell from $0.51 to $0.24, while those for exempt transactions remained constant, at $0.44.40F[40] As can be seen in Figure 2, average interchange fees have remained at roughly the same level since October 2011, averaging $0.23 for covered transactions and $0.43 for exempt transactions.

Figure 2: Average Debit Card Interchange Fees, US, $

Source: Federal Reserve Board

D.   The European Union

Regulations implemented by individual member states notwithstanding, the EU’s actions on interchange fees had, up to 2015, primarily concerned cross-border transactions. For example, the European Commission issued a 2007 decision forcing Mastercard to repeal its fallback interchange fees for cross-border transactions within the European Economic Area.41F[41]

In April 2015, the European Union introduced the Interchange Fee Regulation (IFR), which capped interchange fees for consumer debit cards at 0.2% and for consumer credit cards at 0.3% of the transaction value.42F[42] As a regulation, the caps applied throughout the EU with direct effect; i.e., there was no need for member states to implement enabling legislation and no room for interpretation (although member states were responsible for establishing enforcement authorities). The caps came into force Dec. 9, 2015.43F[43]

The IFR contained numerous other provisions, including:

  • mandatory unbundling of card schemes and processors;44F[44]
  • a requirement that issuers offer consumers “co-badging” options, where these exist;45F[45]
  • a prohibition on the “honor all cards rule” for cards that are not covered by the fee caps;46F[46] and
  • prohibitions on restrictions on steering by merchants.47F[47]

Since Dec. 9, 2015, the default interchange fees on covered cards issued by Visa and Mastercard have been 0.2% for debit and 0.3% for credit. Some national card schemes have continued to offer lower interchange fees.48F[48] By contrast, interchange fees for (unregulated) corporate cards currently range from 0.3% to 1.9%.49F[49]

E.   Some Hypotheses Regarding the Effects of Interchange-Fee Caps

Based on the analysis in Section I, we may posit several hypotheses regarding the likely effects of imposing price controls on interchange fees. These hypotheses are spelled out here and assessed in subsequent sections.

First, since interchange-fee revenue is remitted to issuers, a cap on interchange fees would be expected to reduce revenue to issuers. This is our first hypothesis:

H1: Interchange-fee caps reduce (interchange-derived) revenue to issuers.

Second, interchange-fee price controls will reduce the revenues available to fund card operations but issuers will still need to cover a range of costs. As a result, to the extent possible, issuers will respond to the revenue losses caused by price controls by reducing costs directly associated with cards, such as rewards, and also seek alternative sources of revenue, such as by raising fees on other elements of the card contract (such as annual fees) or by increasing the finance charge on revolving balances:

H2: Issuers subject to the interchange-fee cap will reduce benefits associated with cards subject to the cap and recover lost revenue by raising other fees.

But issuers will not reduce the benefits associated with unaffected cards. Indeed, to the extent that an issuer also offers unaffected cards, it may seek to steer consumers toward those unaffected cards. This gives us our third hypothesis:

H3: Issuers that offer both cards that are subject to a price cap and those that are not will seek to steer consumers toward the uncapped cards.

The increase in costs and reduction in benefits associated with cards subject to interchange-fee caps will lead consumers to shift to other payment methods, including to cards that are not subject to the caps, as well as to cash:

H4: Interchange-fee caps will cause consumers to switch to payment methods not subject to the caps.

Evidence from a range of industries suggests that, when input costs change, businesses rarely pass through all of the change to their consumers in the form of higher or lower prices.50F[50] Moreover, the proportion of changes to input prices that are passed through tends to be asymmetric, with reductions in input prices being passed through at a lower rate than increases in such prices.51F[51] Applying this to changes associated with caps on interchange fees gives us our fifth hypothesis:

H5: Merchants will, on average, pass through reductions in costs associated with reduced interchange fees at a rate considerably less than 100%, but issuers will pass through associated cost increases at a higher rate.

By reducing per-transaction card-related revenue to issuers, the interchange-fee cap reduces issuers’ incentive to invest in innovations that might otherwise lead to increased transactions:

H6: Interchange-fee caps will result in reduced investments in innovative technology.

Through a combination of issuers charging higher fees and offering lower rewards, and limited passthrough by merchants, interchange-fee caps have a particularly adverse effect on lower-income consumers:

H7: Through this combinations of factors, interchange-fee caps will adversely affect financial inclusion.


Our first hypothesis is that, since interchange-fee revenue is remitted to issuers, a cap on interchange fees would be expected to reduce revenue to issuers. Studies looking at the effect of caps in Spain, the United States, and the EU generally confirm this effect.

An econometric analysis of Spain’s series of interchange-fee regulations by Valverde, et al., suggested that the mandatory reduction in interchange fees in Spain increased merchant acceptance and contributed to an increase in the volume of transactions.52F[52] However, the analysis by Valverde, et al., only covered the period 1997-2007, so missed most of the more aggressive period of interchange-fee caps (2008-2010). Iranzo, et al., found that, over the five-year period 2006-2010, total bank revenues from interchange fees fell by €3.3 billion.53F[53]

Estimates suggest that the Durbin amendment initially reduced annual interchange-fee revenue for covered banks by between $4.1 and $8 billion.54F[54] Since then, the volume and value of debit-card transactions has continued to grow and, but for the Durbin amendment, would have grown more rapidly (see below). The result is that, relative to the revenue that covered banks otherwise would have realized, the annual lost interchange-fee revenue may have been as much as $8.9 billion in 2012, growing to $14 billion in 2019.55F[55] Extrapolating to 2021, this implies that over the 10 years since it was first implemented, the Durbin amendment may have caused issuing banks to lose $120 billion or more.

In a 2020 study, Edgar Dunn & Co. found that interchange-fee revenue for debit and credit combined fell by 43% following the introduction of the IFR in the EU.56F[56]


Our second hypothesis is that issuers faced with declining revenue from interchange fees will reduce rewards and increase other fees. While responses vary from jurisdiction to jurisdiction, in general, the evidence supports this hypothesis.

Survey evidence reported by Iranzo, et al., suggests that issuers in Spain reduced the rewards available from cards following the reduction in interchange fees.57F[57] From 2008 to 2010, issuing banks increased interest rates from an average of 3% above the European Central Bank (ECB) base rate in 2005 to 4.6% above base.58F[58] As a result, income from interest payments was nearly 80% higher from 2006 to 2010 than in 2005, representing a total incremental increase in income from interest over the period of about €2.6 billion (although this could be an overstatement, since we are only comparing to revenue in 2005). At the same time, average annual fees on credit cards rose by 50% from €22.94 to €34.39, generating incremental revenue over the period of €1.7 billion. And average annual fees for debit cards rose by 56%, from €11.12 to €17.30 per card, increasing revenue by another €0.6 billion. In other words, incremental interest payments and annual fees made up at least a large fraction of what was lost from the interchange-fee caps.

The Reserve Bank of Australia sought to make credit cards less attractive in order to encourage consumers to use the allegedly more “socially efficient” EFTPOS debit system. The data show that it was successful in this endeavor. Between 2003 and 2011, the average spend required to obtain a A$100 shopping voucher through use of a four-party credit card issued by the four largest banks in Australia went from A$12,400 to A$18,400.59F[59] In addition, issuers introduced caps on the total number of rewards that could be earned in a given period.60F[60] This turns the conventional rewards card model on its head: instead of creating incentives to use the rewards card more to achieve specific additional benefits, Australian credit-card issuers now incentivize rewards-card holders to switch cards when they reach the cap.

Australian issuers also increased the fees they charged on four-party credit cards. Between 2002 (the year before the regulation came into effect) and 2004, the annual fee on a “standard” rewards credit card went from A$61 to A$85 (an increase of about 40%). Over the same period, the fee on a “gold” rewards card rose from A$98 to A$128 (a 30% increase). By 2017, although the structure of rewards-card programs had changed somewhat, the average fee on rewards cards (of various kinds) had risen to A$199—significantly higher, even taking inflation into account, than the fee on a gold card in 2002.61F[61]

In sum, consumers in Australia now pay vastly more for their rewards credit cards and receive considerably fewer rewards for each dollar they spend. As a result, consumers have switched from using credit cards to using debit cards. The volume of debit transactions has increased at a much faster rate than the volume of credit-card transactions. Meanwhile, the value of debit-card transactions has gradually been catching up to the value of credit-card transactions.

U.S. banks covered by the Durbin amendment eliminated or reduced card-rewards programs on debit cards.62F[62]Data from the Federal Reserve Board suggest that rewards on debit cards issued by covered banks averaged approximately $0.05 per transaction in 2009 but fell to about $0.02 per transaction afterward.63F[63]

At the same time, covered banks increased the minimum balance required to qualify for free checking accounts and narrowed the types of account that qualified. In 2008, the average minimum deposit required to maintain a free checking account was $109. By 2012, that figure had soared to $723 and has remained around that level since.64F[64]Manuszak and Wozniak estimated that, following the Durbin amendment, the average minimum balance necessary to quality for a basic (non-interest-bearing) free checking account increased by more than $400, while for interest-bearing checking accounts it had increased by nearly $1,700.65F[65]

Meanwhile, the monthly cost to maintain a checking account had already doubled during the second half of 2010, as banks prepared for the revenue effects of the Durbin amendment.66F[66]

According to data from Bankrate, between 2011 and 2013, the proportion of free checking accounts offered by covered banks fell by half, from 76% to 38%, and remained at about the same level until last year, when they rose to 48% (still considerably lower than the level in 2010).67F[67] Meanwhile, using a proprietary data set, Mukharlyamov and Sarin found that the share of free basic checking accounts held by customers at covered banks fell by about half, from 61% to 28%, following the introduction of the Durbin amendment.68F[68]

Studies show that increased account fees have replaced between 40% and 90% of the reduction in revenue from debit-interchange fees.69F[69]

Turning to the EU, Table II shows that issuing banks made up for the losses on interchange-fee revenue following the introduction of the IFR through a combination of increased interest, late-payment fees, and overdraft fees, which rose by nearly 38%, and from increased international-transaction fees, which rose by 22%.70F[70] However, against expectations(i.e., contrary to our hypothesis) average annual fees for both credit and debit fell by an average of 5.6% between 2014 and 2018. Nonetheless, because of the increases in other fees, overall bank revenue rose by 3.7% following the introduction of the IFR.

Table II: Fees charged by issuing banks in the EU, 2014 and 2018
Fees 2014 2018
Credit Debit Combined Credit Debit Combined Change
Annual Fees 9501 14620 24121 8741 14036 22777 -5.57%
Interest, late & overdraft 13469 8728 22197 15250 15352 30602 37.87%
International transaction 292 985 1277 382 1180 1562 22.32%
Interchange 4343 7527 11870 2258 4474 6732 -43.29%
Total 27605 31860 59465 26631 35042 61673 3.71%

Source: Authors based on Edgar Dunn & Co.71F[71]


The presence of price controls on interchange fees means that consumers will pay higher prices but obtain lower benefits than when fees are set by market forces. Payment devices for which the interchange fee is set by market forces rather than government fiat, by contrast, will offer more net value for consumers. As a result, it would be predicted that consumers will migrate away from those cards that are subject to interchange-fee price controls to those that are unregulated.

This observation leads to two predictions. First (our third hypothesis), where possible, issuers will encourage consumers to switch to cards (and other forms of payment) that are not subject to the caps. Second (our fourth hypothesis), consumers will switch to payment methods not subject to the caps. Again, the evidence from several jurisdictions supports these hypotheses.

Shortly after Australia’s interchange-fee caps for four-party cards came into force in 2003, two banks introduced three-party credit cards with annual fees and rewards similar to those that previously existed on their four-party cards.72F[72]In addition, several issuers introduced packages of two similar premium rewards cards, one that operates on a four-party network and one that operates on a three-party network.73F[73] The reason these “companion cards” existed is that far fewer merchants accept three-party cards than four-party cards; with both cards, consumers could use the higher-earning three-party card where it is accepted and the lower-earning four-party card elsewhere.

Unsurprisingly, the market share of three-party cards, while still relatively small, increased considerably following the 2003 regulations. By volume of transactions, three-party cards increased from about 10% in 2002 to about 16% in 2013 (a 60% increase). By value of transactions, they increased their market share from about 15% in 2002 to more than 20% in 2013 (a 33% increase).

In October 2015, the RBA designated American Express Companion Cards as a “payment system.”74F[74] In its May 2016 Review of Card Payments Regulation, the RBA announced that these cards would—effective July 1, 2017—be subject to the same interchange-fee caps as other cards so designated.75F[75] Following introduction of the caps, companion cards were discontinued and the market share by volume of three-party cards fell back to 7%. But, as seen in Figure 3, it has since risen slightly to about 8%.76F[76] By value, three-party cards’ market share of transactions also fell steeply after mid-2017, but it has risen again since then. In addition, the number of three-party cards held by consumers increased by 36,000 in the year to October 2021, while the number of four-party cards fell by 750,000.77F[77]

These trends suggest that consumers who qualify for three-party cards increased adoption, presumably in no small part because the cards are not subject to interchange-fee caps and therefore are able to offer attractive rewards. Likewise, consumers with both three-party and four-party cards tend to use the former where possible, in order to obtain the larger rewards.

Figure 3: Market Share of Four-Party Cards (Mastercard and Visa, left axis) and Three-Party Cards (American Express and Diners Club, right axis) by Volume of Transactions in Australia, 2002-2021

Source: Reserve Bank of Australia78F[78]

Figure 4: Market Share of Four-Party Cards (Mastercard and Visa, left axis) and Three-Party Cards (American Express and Diners Club, right axis) by Value of Transactions in Australia, 2002-2021

 Source: Reserve Bank of Australia79F[79]

Because the Durbin amendment did not apply to credit cards, U.S. issuers had no reason to reduce rewards on those cards. In response, many consumers switched from using debit to using credit for transactional purposes, paying their balance each month in full rather than revolving.80F[80] As a discussion paper by the Federal Reserve Bank of Philadelphia Consumer Finance Institute put it, this switch from debit to credit was driven by a combination of “regulatory changes in the debit space that limited interchange, making debit rewards less financially viable for depository institutions and a change in preferences by both card issuers and consumers for more and richer rewards as incentives for using a particular form of payment.”81F[81]

Consumers without credit cards—predominantly those with poor credit records—were not positioned to switch from debit to credit. They thus replaced their debit usage with increased use of cash and checks.82F[82] To the extent that debit-only consumers tend to be lower income, the cuts in debit-card rewards and the rising cost of checking accounts, both brought on by the Durbin amendment, have had regressive effects, while higher-income consumers switched to credit cards whose rewards rates remain unaffected.

The EU’s dramatic caps on interchange fees appear to have led issuers to limit card issuance in general and to shift consumers away from credit and toward debit. In a study funded by the European Commission, Ernst & Young and Copenhagen Economics (EY/CE) found that the number of credit cards issued in the EU fell following the introduction of the IFR, while the number of debit cards grew only modestly.83F[83] They observe:

We find that the total number of issued consumer cards in the EU as reported by the schemes changed moderately between 2015 and 2017. The total number of consumer debit cards in the EU grew by 3% and 4% respectively in 2016 and in 2017 … The number of credit cards declined by 1%. The larger decline in the number of credit cards could be related to the large reduction in interchange fees for credit card transactions to meet the interchange fee cap.84F[84]

The EY/CE study also found that the proportion of corporate cards, as a share of all cards, increased in several member states. The shift was particularly dramatic in Ireland, where the proportion of corporate cards went from about 6% in 2015 (before the IFR) to about 14% in 2017.85F[85] Moreover, EY/CE found that the number of commercial-card transactions increased by a weighted average of 12.4 million per member state.86F[86] Since corporate cards are not subject to the IFR, it would seem that issuers sought, in part, to recoup losses by switching eligible consumers to the use of corporate cards.


One of the primary justifications made by legislators and regulators for introducing caps on interchange fees is that these fees drive up the merchant discount rate, which in turn leads merchants to raise the prices of goods and services offered to consumers. For example, an oft-cited 2010 study estimated that low-income U.S. households pay on average an additional $21 per year on goods and services due to credit-card interchange fees and card rewards.87F[87] To arrive at this number, the study assumed that interchange fees are fully passed through to consumers in the form of higher prices.

However, the only reason the overwhelming majority of merchants would pass on all cost savings is that they believe their consumers would otherwise buy their goods and/or services elsewhere—in other words, it assumes the merchants have zero market power. While that might be true for retailers of gasoline and diesel, it is unlikely to be true for retailers of less homogenous goods and services.88F[88] Most retailers have some degree of pricing power because of the idiosyncratic nature of the products they sell and the way in which they are sold (which can include factors such as location, expertise of the staff, the way products are displayed, among others).89F[89] Indeed, the evidence for cost passthrough in general indicates that, while cost increases are often passed through at rates of around 90%, cost decreases are typically passed through at much lower rates.90F[90]

In addition, a 100% pass-through rate would imply that merchants would reap none of the benefit from a reduction in interchange fees. As such, they would have no incentive to lobby for such a change. Since some merchants do lobby for reduced interchange fees, it seems highly likely that they enjoy some degree of pricing power in their given markets and are thus able to pass through less than 100% of the reduction in interchange fees.91F[91]

Hence our fifth hypothesis, that merchants will pass through relatively little of the cost savings from reduced interchange fees, whereas card issuers will pass on much of the losses they incur. As noted above, most of card issuers’ revenue losses are passed on to consumers in the form of higher prices and lower benefits. Merchants, by contrast, demonstrate much lower pass-through rates of cost savings. Moreover, cost savings tend to be passed through at a lower rate to consumers than cost increases.

Iranzo, et al., found that, while acquirers in Spain reduced the merchant service charge (MSC)—the European equivalent of the merchant discount rate—they did so by less than the reduction in the interchange fee.92F[92] Over five years, the difference totaled more than €440 million. However, this may partially reflect unavoidable per-transaction costs, so the net amount received by acquiring banks may have been less.

While acquirers passed through to merchants much (but not all) of the reduction in interchange fees, merchants appear to have passed though little, if any, of their savings to consumers. The survey by Iranzo, et al., of merchant groups asked directly whether their members had reduced prices of goods and services or improved the quality of offerings in response to the interchange-fee caps. Perhaps surprisingly, the response was uniformly negative: merchants had not passed on their savings in any way.93F[93]

Since the additional costs of using payment cards were directly paid by consumers in the form of higher annual fees and interest payments, and since consumers seem not to have obtained any benefit in the form of lower prices or higher-quality goods and services, it seems clear that the main effect of the interchange-fee cap in Spain was to transfer wealth from consumers to big-box merchants.

The Reserve Bank of Australia’s hope that its interchange-fee regulations would save consumers money does not appear to have materialized. In the 19 years since the regulations went into effect, there has been no substantive evidence that merchants have passed savings on to consumers. Even assuming that some savings have been passed on, it is very unlikely that the savings for the average consumer have been anywhere close to the costs imposed on them by the regulation in the form of increased fees on, and reduced benefit from, rewards cards.

The average merchant service charge on four-party cards fell from about 1.4% prior to the interchange-fee cap to around 0.7% in 2020—a reduction of 0.7 percentage points, or 50% in relative terms (see Figure 5).94F[94] Since Mastercard and Visa credit-card transactions make up about a quarter of retail transactions, the overall effect on a typical merchant would have been a reduction in per-transaction costs of about 0.17%. Thus, even if these savings had been fully passed through, the average consumer would have seen prices fall by less than 0.2%. But because the consumer price index in Australia has risen, on average, by 2.3% annually since 2002,95F[95] it would be difficult to discern such an effect.

Figure 5: Total Merchant Service Fees for Various Payment Networks in Australia, 2003—2020

Source: Reserve Bank of Australia

Evidence from Surcharging In Australia

Following the 2002 regulations, merchants have also been able to impose surcharges on payments made with credit cards in Australia. However, most merchants have not introduced surcharges.96F[96] A 2010 survey commissioned by the RBA found that less than 10% of large merchants and less than 5% of small merchants imposed surcharges in 2005. By 2010, however, around a quarter of small merchants and nearly half of all large merchants were surcharging.97F[97]  A subsequent survey conducted by the RBA in 2013 found that just under 7% of Mastercard and Visa credit-card payments were subject to surcharges.98F[98]

Merchants who introduced surcharging did so as a form of price discrimination in instances where consumers have an inelastic demand for using cards (such as online purchases, airline tickets, or hotel rooms) or where merchants are not constrained by repeat purchasers (such as on travel and restaurants).99F[99] So, while surcharging is not at all uniform, it was highly prevalent in areas where price discrimination and rent-seeking are profitable.

Moreover, until caps came into force (see below), merchants almost ubiquitously imposed surcharges at rates that were considerably higher than the cost of acceptance: the RBA survey found that average surcharges in 2013 were 1.5% of payment value. Because average merchant-service fees were 0.8%, this represents a nearly 90% markup over the MSC.100F[100]

Clearly, merchants had been using surcharges as a means of price discrimination against consumers who used credit cards. As a result, many consumers making purchases with credit cards at merchants who imposed surcharges were hit with a triple whammy: higher annual fees, fewer rewards, and higher prices.

In 2016, the Australian Parliament passed legislation prohibiting merchants from applying “excessive” surcharges and capping any surcharge at an amount that reflects “the cost of using the payment methods for which they are charged.” 101F[101] The rules, laid out in more detail in a standard issued by the RBA, came into force in September 2016 for large merchants and September 2017 for smaller merchants.102F[102] The surcharge rules are enforced by the Australian Competition and Consumer Protection Commission, which has issued several fines to companies found to be in violation.103F[103] In response, merchants have reduced their surcharges, as the RBA notes:

“Merchants have generally responded appropriately to the new framework coming into effect. Most notably, the airline industry moved from fixed-fee surcharges (see above) to a percentage-based surcharge with a fee cap. Prior to the reform, a $100 domestic flight would have attracted a surcharge of up to $8.50 for debit and credit cards alike. Following the reform, the same flight would attract a maximum surcharge of $1.30 for credit cards and $0.60 for debit cards (calculated as a percentage of the cost of the airfare).”104F[104]

More precise estimates of the extent of passthrough have been possible for the United States. Using proprietary data from banks and one of the card networks, Mukharlyamov and Sarin estimated that merchants passed through “at most” 28% of their debit-card savings to consumers. Meanwhile, banks passed through 42% of their interchange-fee revenue losses to consumers (with most of those losses passed on to lower-income consumers who pay higher bank fees). They estimate that the net result of this was a $4 billion transfer to merchants, of which $3.2 billion came directly from banks and $0.8 billion from consumers, who paid $2.3 billion in higher checking fees but received only $1.5 billion in lower retail prices.

Wang, Schwartz, and Mitchell, found that, while some merchants received reductions in the merchant discount rate they paid, others actually saw their debit-card acceptance costs increase.105F[105] They found an asymmetric response: merchants who saw their prices increase usually passed those increased costs onto their customers, while very few of those who saw their debit costs decrease passed those costs onto customers. This suggests that there was very little passthrough of savings by merchants (certainly far less than 100%) and that, if there was any substantial passthrough at all, it was greatly delayed.

The story is similar for the EU, where EY/CE estimated that, on average, acquirers passed through about 45% of the reduction in interchange fees (see Table III). Meanwhile, EY/CE also estimated that the average EU-wide pass-through rate by merchants of the lower MSC is 66%.106F[106] Taking these two pass-through rates together, on average, EU consumers would have received about 30% of the reduction in interchange fees in the form of lower costs and/or improved quality.107F[107]

To some extent, these averages, mask differences among member states. For example, EY/CE found that a typical Polish household would save only €1.53 per year, while a household in Italy would save as much as €12.42. However, as Edgar Dunn & Co. noted, banks more than made up for the lost interchange-fee revenue in the form of higher charges. Since those charges were mainly in the form of increases in interest and late-payment fees, it is likely that they would have mainly affected lower-income households that are more reliant on the use of overdrafts and credit cards for short-term credit.108F[108]

Table III: Change in Acquirer’s Margin following the IFR
Fees Change (EUR million) Effect on acquirers
Change MSC -1,200 Revenue loss
– Change interchange fee -2,680 Cost saving
– Change acquirer scheme fee 280 Cost increase
= Change acquiring margin 1,200 Margin increase

Source: EY/CE study


Our sixth hypothesis is that interchange-fee caps will reduce issuing banks’ incentive to invest in innovative technology. The evidence seems to support this hypothesis.

Consider, for example, investments in innovation by EFTPOS, Australia’s domestic debit-card network. In its 2015 Review of Card Payments Regulation, the Reserve Bank of Australia noted that “the greater functionality of the international scheme cards (eftpos is still working to develop online and contactless functionality) has also contributed to the shift in market shares.”109F[109] As of September 2021, EFTPOS still had not developed online functionality.110F[110]

The consequence of this lack of innovation for EFTPOS has been little short of catastrophic. Far from becoming the dominant low-cost transaction network for Australia’s consumers, as the RBA had hoped, the proportion of debit transactions undertaken via EFTPOS declined from 82% in 2009 to 40% in 2020, while the value of debit transactions declined by an even larger amount, as can be seen in figure 6.

Figure 6: Value and Volume of Debit Transactions in Australia, 2009- 2020

Source: Blockley, 2021

As Lance Blockley noted in a submission to the Australian Competition and Consumer Commission (ACCC) regarding the proposed merger of EFTPOS, NPP Australia, and BPay, made on behalf of the merging parties:

[T]he debit card market was originally the sole domain of eftpos (from its launch in 1983), until Visa Debit was launched in the market in the 1990’s. Scheme Debit (the term covering Visa Debit and Mastercard Debit) was initially focused on the smaller financial institutions, but eventually became adopted by the four major banks as, unlike eftpos, they were able to be used both online and overseas (making them attractive to consumers); in addition, they generated positive interchange revenue for issuers (at a time when eftpos caused a negative interchange outflow for issuers), making them attractive to the banks.

As Scheme Debit became more issued and used in the market, and consequently eftpos’s share of the total debit card transaction volume fell, the number of eftpos transactions still grew in total due to the strong increases in total debit card volumes. The state of declining share but increasing absolute volume slowed severely for eftpos, however, when contactless debit card transactions became widely adopted, as shown in the charts below.111F[111]

In 2018, the Australian government’s Productivity Commission issued a report about competition in the banking sector that noted with concern the decline in EFTPOS’ market share, asserting:

The decline in market share of eftpos is concerning because eftpos is considered highly price-competitive…. This suggests that competition is stymied by other forces, such as distortions in who pays the costs of card payments.112F[112]

Yet, as noted above, EFTPOS’ own consultant acknowledges that EFTPOS previously had a monopoly in the debit market and that its declining market share is largely a result of consumer preferences for Visa and Mastercard debit that, unlike EFTPOS, enable users both to pay online and to use contactless.

Clearly, EFTPOS’ failure to develop online and contactless functionality was a major drawback and is almost certainly related to its relative lack of investment in innovation, which in turn is a function of its bargain-basement cost model. Logically, the decline in EFTPOS’ market share was driven by competition, not stymied by it.

It should also be noted that Australia has one of the highest penetrations of contactless cards in the world (something that likely helped facilitate continued in-person shopping in the country during the COVID-19 pandemic). This has been thanks almost entirely to Visa and Mastercard, which, unlike EFTPOS, have been able to recover the costs of investment in innovations in other markets.

As with Australia, there is some tentative evidence that domestic networks in the EU may be underinvesting in innovation due to the very low interchange rates mandated by the IFR. As reported by EY/CE, the market share of domestic payment networks declined slightly between 2014 and 2016, with the market share of domestic debit-card schemes falling from 81% to 78% on average and the market share of domestic credit-card schemes falling from 72% to 68% on average (in those member states that have such schemes).113F[113]

In the United States, the Durbin amendment has substantially diminished covered banks’ ability to recover investments in payment innovations that would benefit both merchants and consumers. As a result, some potentially valuable new technologies likely have not been developed and implemented as quickly as they otherwise might have been.114F[114]

Jonathan Reinisch argues that, by dampening investment in innovation, the Durbin amendment has delayed the otherwise “inevitable” shift to mobile payments.115F[115] These reduced investments are driven by two factors: first, the redistribution of costs, as discussed above, which constrains card issuers’ ability to recover investments in innovation, and second, the fee cap itself, which has the effect of reducing the potential savings that merchants might realize from switching to a payment system with lower fees.

Meanwhile, Zywicki predicted that “the arbitrary definition that the Durbin amendment provides for debit cards will promote regulatory arbitrage, as competitors seek to gerrymander products out of the amendment’s net.”116F[116] And that is precisely what we have seen, with various financial-technology (or “fintech”) companies issuing debit cards by partnering with banks whose assets fall below $10 billion.117F[117] The higher interchange-fee revenue from each customer means that, relative to covered banks, fintechs are able to:

  • invest more in R&D, thereby improving their offerings and exacerbating their differential from covered banks;
  • spend more acquiring new customers in other ways, including by offering reward programs; and
  • serve customer niches not currently served by covered banks.

While this arbitrage has allowed various new payment technologies to be rolled out, the pace of roll-out is arguably slower than would be the case if larger banks could also partner with fintechs.


Our final hypothesis is that caps on interchange fees would adversely affect financial inclusion. Support for this hypothesis comes in part from the observation that more of the costs of regulation tend to be borne by lower-income consumers, which has been noted above for Australia and the EU.

More direct evidence, however, comes from the United States, where caps on debit-card interchange fees have adversely affected access to banking. To see this, it helps to go back a few years before the introduction of the Durbin amendment. As can be seen in Figure 7, during the 2000s, debit-card transaction volume exploded: in 2000, debit was responsible for about one-fifth as many transactions as checks, but by 2007, it had overtaken checks in popularity.

Figure 7: Volume of Payments by Type, U.S., 2000-2018 (billions)

Source: Federal Reserve Payments Studies

This rise in debit-card volume coincided with a significant reduction in the average cost of checking accounts, an increase in the number of “free” checking accounts, and a reduction in the minimum balance required to qualify for free checking. According to a U.S. Government Accountability Office report, between 2000 and 2006, the proportion of banks offering free checking accounts doubled from 30% to 60%, while monthly maintenance fees fell from $6.81 to $5.41.118F[118]

This is not surprising, as the two things are related in a virtuous circle: rising debit-card use increased revenue from interchange fees on debit, which in turn enabled banks to reduce checking-account charges, which increased the number of account holders, which increased debit-card use. At the same time, debit-card purchases mainly replaced purchases made using checks, which are expensive to process. By dramatically expanding access to free checking and eliminating monthly maintenance fees, the introduction and rapid adoption of debit cards dramatically expanded financial inclusion for many consumers who traditionally could not afford a checking account.

As noted in Section IV, the introduction of caps on debit-card interchange fees reversed this trend: debit-card interchange-fee revenue fell, so banks were less able to subsidize free checking accounts. Mukaharlyamov and Sarin estimated that, in the absence of the Durbin amendment, the proportion of free checking accounts would have risen to 66%. Since the actual number was 29%, they infer that Durbin caused a reduction of 37 percentage points.119F[119]

Unsurprisingly, the loss of access to free checking accounts and the increase in monthly fees both disproportionately affect lower-income consumers. Mukharlyamov and Sarin found that:

[O]ver 70 percent of consumers in the lowest income quintile (annual household income of $22,500 or less) bear higher account fees, since they fall below the average post-Durbin account minimum required to avoid a monthly maintenance fee ($1,400). In contrast, only 5 percent of consumers in the highest income quintile (household income of $157,000 or more) keep balances falling below this threshold.120F[120]

By reducing the availability of free checking and increasing the cost of bank accounts, the Durbin amendment likely resulted in many lower-income people becoming “underbanked” and some people to become unbanked (exiting the banking system altogether). Federal Deposit Insurance Corp. (FDIC) data show that, between 2009 and 2011, the number of unbanked households rose by one million and the number of underbanked households rose by three million. As a result, many of those unbanked and underbanked individuals will have relied on more costly alternatives, such as money orders, prepaid cards, and check-cashing services.121F[121] Plausibly, some of that increase was due to the lower availability of free checking and the increased cost of bank accounts, as banks readied for the implementation of the Durbin amendment.

The proportion of unbanked households has gradually fallen since peaking in 2011; in 2019, it was lower than in 2009. But it is noteworthy that among those consumers who remain unbanked, whereas 12.7% of respondents gave “minimum balance requirements too high” as a reason for not having a bank account in 2009, by 2019, 29% of households gave that as the main reason for not having a bank account and 48.9% identified this obstacle as a factor.122F[122]In addition, 34% identified “bank account fees too high” as a reason, with 7.3% citing it as the “main” reason.123F[123] This suggests that, as the economy has grown stronger, the cost increases brought about in response to the Durbin amendment have become a more significant cause of households being unbanked.

Mukharlyamov and Sarin looked specifically at the difference in the proportion of unbanked individuals between 2011 and 2013 and found an 81% increase in the percentage of unbanked consumers who said that high account fees was their main reason for not having a bank account.124F[124] Further support for the hypothesis that the Durbin amendment has caused households to become unbanked comes from the finding that residents of states with the highest proportion of deposits at banks with assets in excess of $10 billion were most likely to attribute their unbanked status to high fees.125F[125]The growth in the recently unbanked was also highest in states with more affected banks, where the increase in account fees is most pronounced.

These findings contrast dramatically with the hypothetical claims made by Schuh, et al., who claimed that lower-income consumers could save as much as $21 per year in lower retail costs from interchange-fee price controls.126F[126] To make that claim, they assumed full passthrough by merchants of the reduction in acceptance costs, while implicitly assuming no passthrough of revenue losses by banks (such as through reduced access to free checking, higher required minimum balances, and higher bank fees). Even if Shuh, et al., were correct about the nominal savings by lower-income consumers, these are clearly massively outweighed by higher bank fees, which are estimated in the range of $115 to $172 per year.127F[127]

IX. Conclusion

Overall, it is clear that imposing price caps on interchange fees has had many pernicious effects and that, in contrast to the claims of those who support them, they have done far more harm than good.

First and foremost, interchange-fee caps have harmed the very people they were supposed to help. Wherever they have been implemented, they have resulted in lower revenue for issuing banks, which have responded by increasing fees for consumers, either on bank accounts, on credit cards, or both. These fee increases have in general been highly regressive, hurting those with lower incomes the most.

Second, in some cases, such as with the Durbin amendment in the United States, the higher fees have resulted in many people becoming unbanked.

Third, in nearly all cases, issuers have reduced the rewards on payment cards. But those with higher incomes and/or better credit records have often been able to switch to alternative payment cards that are not subject to the caps. So, the reductions in rewards have mainly harmed the poor and those with poor credit records.

Fourth, the rate at which merchants have passed through reductions in costs associated with lower interchange fees (in the form of lower-priced goods) has been less than the rate at which banks have passed through losses in fee revenue—in the form of higher-priced accounts, cards and services, and reductions in rewards. As such, consumers have lost out on net.

Fifth, interchange-fee caps have had somewhat predictable effects on modes of payment and hence on investments in those modes of payment. Thus, the Durbin amendment, which exclusively affected debit, led to a shift in payments toward credit and impeded investment in debit-related payment technologies (until fintech companies realized they could partner with exempt financial institutions). By contrast, the caps in Australia and the EU were effectively tighter for credit than for debit (since the difference between the interchange-fee rates before the caps and after the caps was greater for credit than debit), which led to shifts away from credit and toward debit. However, the caps were so low that investment in domestic debit systems seems to have been impaired, especially in Australia.

* Todd Zywicki is the George Mason University Foundation Professor of Law at the Antonin Scalia Law School, senior

fellow at the Cato Institute, and an academic affiliate of the International Center for Law & Economics (ICLE). Julian Morris is a senior scholar with ICLE. Geoffrey A. Manne is ICLE’s president and founder.

[1] See Developments in Noncash Payments for 2019 and 2020: Findings From the Federal Reserve Payments Study, Federal Reserve Board,(December 2021), available at, and the various previous studies and associated data,

[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; 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).

[3] Claire Tsosie, The History of the Credit Card,, (Mar 15, 2021),; see also Jeremy Norman, The Charga-Plate, Precursor of the Credit Card, Circa 1935 to 1950,,

[4] See Zywicki, supra note 2. Several banks also attempted to establish three-party cards during the 1950s. Most of these were unsuccessful. The exception was Bank Americard, which subsequently became a four-party system and eventually rebranded as Visa.

[5] The issuer may arrange separate underwriting. More recently, the processing of three-party card transactions are sub-contracted to other payment processors. But the fundamental three-party legal arrangements remain the same.

[6] For a more detailed explanation of the operation of payment card systems, see Zywicki, supra note 2, at 27-30.

[7] See Zywicki, supra note 2; see also Jean-Charles Rochet & Jean Tirole, Two-Sided Markets: A Progress Report, 37 Rand J. Econ. 645 (2006); As the U.S. Supreme Court wrote in Ohio v. American Express Co. (585 U.S. Slip Op, 2018, at 2):

By providing these services to cardholders and merchants, credit-card companies bring these parties together, and therefore operate what economists call a “two-sided platform.” As the name implies, a two-sided platform offers different products or services to two different groups who both depend on the platform to intermediate between them.”… For credit cards, that interaction is a transaction…. The key feature of transaction platforms is that they cannot make a sale to one side of the platform without simultaneously making a sale to the other.

[8] Bruno Jullien, Alessandro Pavan, & Marc Rysman, Two-Sided Markets, Pricing, and Network Effects, in Handbook of Industrial Organization (Vol. 4), 485-592, (2021).

[9] Thomas Eisenmann, Geoffrey Parker, & Marshall W. Van Alstyne, Strategies for Two-Sided Markets, Harv. Bus. Rev. (October 2006).

[10] See William F. Baxter, Bank Interchange of Transactional Paper: Legal and Economic Perspectives, 26 J. L. & Econ. 541 (1983).

[11] See Ronald H. Coase, The Problem of Social Cost, 3 J. L. & Econ. 1 (1960).

[12] See Zywicki, supra note 2, at 31-32.

[13] See Zywicki, supra note 2, at 33.

[14] Zywicki, supra note 2, at 10.

[15] Tsosie, supra note 3.

[16] See Frank Kehl, The Complete Guide to Merchant Account & Credit Card Processing Fees, Merchant Maverick, (Nov. 12, 2021). For a description of CNP transactions, see Ben Dwyer, Card Present vs. Card Not Present Transactions, CardFellow, (Apr. 6, 2020),

[17] Visa USA Interchange Reimbursement Fees, Visa Public, (Oct. 15, 2021), available at; Mastercard USA Interchange Rates, Helcim,

[18] Id.

[19] See Thomas A. Durkin, Gregory Elliehausen, Michael E. Staten, & Todd J. Zywicki, Consumer Credit and the American Economy, (2014), at 347, Fig. 71.

[20] Eliana Garcés & Brent Lutes, Regulatory Intervention in Card Payment Systems: An Analysis of Regulatory Goals and Impact, working paper, (Sep. 21, 2018),, at 8. As Garces and Lutes note: “Practically all open network schemes have set some default interchange fees that apply automatically when no bilateral agreement exists between banks. No widely adopted international scheme relies solely on bilateral negotiations for the interchange fee. This may be due to the excessive level of information complexity that a system of bilaterally negotiated fees would imply for merchants. To assess the cost of a card payment, the merchant would have to know not only the brand and type of the card used, but also the identity of the issuer. Additionally, given that most card systems impose an “honor all cards” rule on merchants, the absence of a common interchange fee may lead some issuing banks to impose high interchange fees for the cards that they issue and that the merchant is forced to accept. Although there are open network schemes that have operated without interchange fees, these are very rare and with limited regional scope.”

[21] Baxter, supra note 10, at 572-582.

[22] Zywicki, supra note 2, at 33; Jean-Charles Rochet and Jean Tirole, Platform Competition in Two-Sided Markets, 1 J. Europ. Econ. Assoc. 990-1029, (Jun 1, 2003), at 997; Julian Wright, Pricing in Debit and Credit Card Schemes, 80 Econ. Lett 305-309, (2003).

[23] Summary of Commission Decision of 19 December 2007 Relating to a Proceeding Under Article 81 of the EC Treaty and Article 53 of the EEA Agreement (Case COMP/34.579 — MasterCard, Case COMP/36.518 — EuroCommerce, Case COMP/38.580 —Commercial Cards), Official Journal of the European Union, (Nov. 6, 2009), available at, at 19.

[24] Ohio v Amex, supra note 7, at 13.

[25] Jean-Charles Rochet & Jean Tirole, An Economic Analysis of the Determination of Interchange Fees in Payment Card Systems, 2 Rev. Netw. Econ. 69-79, (January 2003).

[26] For a fairly comprehensive overview of such caps, see Fumiko Hayashi & Jesse Leigh Maniff, Public Authority Involvement in Payment Card Markets: Various Countries, August 2020 Update, Federal Reserve Bank of Kansas City, (August 2020), available at

[27] Juan Iranzo, Pascual Fernández, Gustavo Matías, & Manuel Delgado, The Effects of the Mandatory Decrease of Interchange Fees in Spain, Munich Personal RePEc Archive, MPRA Paper No. 43097, (October 2012), available at

[28] Standard No. 1 The Setting of (Wholesale) Interchange Fees, Reserve Bank of Australia, (2002). The same standard was issued to each four-party card issuer.

[29] Media Release: Reform of Credit Card Schemes in Australia, 2002-15, Reserve Bank of Australia, (Aug. 27, 2002),

[30] Media Release: Payments System Board – November 2005-13, Reserve Bank of Australia, (Nov. 25, 2005),

[31] Common Benchmark for the Setting of Credit Card Interchange Fees, Reserve Bank of Australia, (November 2005),

[32] Media Release: Payments System Reform, 2005-02, Reserve Bank of Australia, (Feb. 24, 2005), available at

[33] Media Release: Payments System Reforms Number 2006-02, Reserve Bank of Australia, (Apr. 27, 2006),

[34] Credit Card Benchmark Calculation, Reserve Bank of Australia, (2006), available at

[35] Payment Systems (Regulation) Act 1998 Variation of Interchange Fee Standards, Reserve Bank of Australia, (2008), available at

[36] Payment Systems (Regulation) Act 1998, Standard No. 1 of 2016, The Setting of Interchange Fees in the Designated Credit Card Schemes and Net Payments to Issuers, Reserve Bank of Australia, (May 26, 2016), available at

[37] H.R.4173 – Dodd-Frank Wall Street Reform and Consumer Protection Act, s.1075(a)(3).

[38] Debit Card Interchange Fees and Routing; Final Rule, 76 Fed. Reg. 43,393-43,475, (Jul. 20, 2011).

[39] The fraud-prevention measures were initially spelled out in an interim final rule published on the same day: Debit Card Interchange Fees and Routing; Interim Final Rule, 76 Fed. Reg. 43,477-43,488, (Jul. 20, 2011). They were subsequently incorporated into an amended final rule: 77 Fed. Reg. 46,258-46,282, (Aug. 3, 2012).

[40] See Zywicki, et al., Unreasonable and Disproportionate, supra note 2. See also Regulation II (Debit Card Interchange Fees And Routing), Board of Governors of the Federal Reserve System, (Jul. 18, 2019),

[41] The decision related to a case originally brought in response to a 1992 complaint by the British Retail Consortium related to the interchange fees and network rules of Europay (now Mastercard) and Visa-branded cards.  See Non-Confidential Version of Commission Decision of 19 December 2007, COMP/34.579 MasterCard, COMP/36.518 EuroCommerce and COMP/38.580 Commercial Cards, The Commission of the European Communities, (Dec. 19, 2007), available at For a summary, see Summary of Commission Decisions, supra note 23.

[42] Regulation (EU) 2015/751 of the European Parliament and of the Council of Apr. 29, 2015, on Interchange Fees for Card-Based Payment Transactions, Official Journal of the European Union, (Apr. 29, 2015), at 10-11, Articles 3 and 4. Note that these caps did not apply to corporate cards, as discussed below.

[43] Id., at 14, Article 18.

[44] Id. Article 7.

[45] Id. Article 8. Co-badging is defined as: “The inclusion of two or more payment brands or payment applications of the same brand on the same card-based payment instrument.” (Per Regulation (EU) 2015/751, Art. 2).

[46] Id. Article 10.

[47] Id. Article 11.

[48] Study on the Application of the Interchange Fee Regulation: Final Report, prepared by Ernst & Young and Copenhagen Economics (“EY/CE study”) for the European Commission, (2020), available at, at 89.

[49] Intra-EEA – Intercountry Interchange Fees, Mastercard, (Jan. 22, 2021); Intra Europe EEA Multi-lateral Interchange Fees, Visa, (Oct 16, 2021).

[50] EY/CE study, supra note 48, at 169-170; Cost Pass-Through: Theory, Measurement, and Potential Policy Implications, prepared by RBB Economics (“RBB Economics study”) for the U.K. Office of Fair Trading, (February 2014).

[51] Sam Peltzman, Prices Rise Faster Than They Fall, 108 J Polit. Econ. 466-502, (June 2000).

[52] Santiago Carbó Valverde, Sujit Chakravorti, & Francisco Rodríguez Fernández, The Role of Interchange Fees in Two-Sided Markets: An Empirical Investigation on Payment Cards, 98 Rev. Econ. Stat. 367–381, (Apr. 21, 2016),

[53] Iranzo, et al., supra note 27.

[54] See Benjamin S. Kay, Mark D. Manuszak, & Cindy M. Vojtech, Competition and Complementarities in Retail Banking: Evidence From Debit Card Interchange Regulation, 34 J. Fin. Intermediation 91, 92 (2018); see also Vladimir Mukharlyamov & Natasha Sarin, Price Regulation in Two-Sided Markets: Empirical Evidence From Debit Cards, working paper, (December 2019) (estimating $5.5 billion annual revenue loss to banks from interchange-fee reductions); Bradley G. Hubbard, The Durbin Amendment, Two-Sided Markets, and Wealth Transfers: An Examination of Unintended Consequences Three Years Later, working paper, (May 20, 2013),, at 20 (estimating annual revenue loss of $6.6 billion to $8 billion from the Durbin amendment).

[55] See Out of Balance: How the Durbin Amendment Has Failed to Meet Its Promise, Electronic Payments Coalition, (December 2018), available at

[56] Interchange Fee Regulation Impact Study, Edgar Dunn & Co., (April 2020), available at

[57] Iranzo, et al., supra note 27, at 34-37.

[58] Id., at 27. See also marginal lending facility rates from European Central Bank,

[59] Iris Chan, Sophia Chong, & Stephen Mitchell, The Personal Credit Card Market in Australia: Pricing Over the Past Decade, Reserve Bank of Australia Bulletin, (March 2012), available at

[60] Robert Stillman, William Bishop, Kyla Malcolm, & Nicole Hildebrandt, Regulatory Intervention in the Payment Card Industry by the Reserve Bank of Australia: Analysis of the Evidence, CRA International, (2008), at 16.

[61] Emily Perry & Christian Maruthiah, Banking Fees in Australia, Reserve Bank of Australia Bulletin, (June 2018), available at, at 5.

[62] See Darryl E. Getter, Regulation of Debit Interchange Fees, Congressional Research Service, (May 16, 2017), at 8; see also Out of Balance: How the Durbin Amendment Has Failed to Meet Its Promises, Electronic Payments Coalition, (Dec. 2018), at 7. Eliminating rewards, such as cash-back on purchases, is functionally equivalent to a price increase.

[63] Kay, et al., supra note 54, at 99, citing 2009 Interchange Revenue, Covered Issuer Cost, and Covered Issuer and Merchant Fraud Loss Related to Debit Card Transactions, Federal Reserve Board, (2011), available at: 2011 Interchange Fee Revenue, Covered Issuer Costs, and Covered Issuer and Merchant Fraud Losses Related to Debit Card Transactions, Federal Reserve Board, (2013), available

[64] Mukharlyamov & Sarin estimated a 21% increase in the monthly minimum needed to be eligible for free checking and to avoid having to pay monthly fees.

[65] Mark D. Manuszak & Krzysztof Wozniak, The Impact of Price Controls in Two-Sided Markets: Evidence From US Debit Card Interchange Fee Regulation, Board of Governors of the Federal Reserve System Finance and Economics Discussion Series, FEDS Working Paper No. 2017-074, (Jul. 10, 2017), at 5. Two recent surveys by consumer finance websites of the largest banks’ account terms also illustrate the high cost to those who no longer qualify for free checking accounts. A survey by reported an average monthly maintenance fee of $14.39 ($172.68 per year) on the accounts it surveyed. See Richard Barrington, How Much Are Bank Fees—The Latest MoneyRates Update,, (Aug. 20, 2020), A study by another website reported an average monthly fee on the accounts reviewed of $9.60 ($115.20 per year) and the minimum balance necessary to waive the fee was $1,010. See Theresa Kim, Checking Account Fee Comparison at Top U.S. Banks,, (Jul. 23, 2020), This survey includes one Internet bank that reports no monthly fee, with no minimum balance required. If that bank is excluded, the average monthly fee would be $10.61.

[66] Mukharlyamov & Sarin, supra note 54, at 2-4. They concluded that average monthly checking account fees increased from $3.07 to $5.92. Id., at 4.

[67] Matthew Goldberg, Survey: Free Checking Accounts on the Rise as Total ATM Fees Fall,, (Oct. 20, 2021),

[68] Mukharlyamov & Sarin, supra note 54, at 2-4.

[69] Mukharlyamov & Sarin, supra note 54, at 4, estimated that issuers lost approximately $5.5 billion in reduced interchange-fee income annually, of which they recouped about $2.3 billion in higher bank fees, or approximately 42% of lost revenue. Meanwhile, Kay, et al., supra note 54, at 99, estimated that banks increased other fees by about $4 billion in total, offsetting about 90% of the revenue reduction of approximately $4.1 billion in debit-interchange fees. Note that these studies did not seek to extrapolate the losses, so the proportions are based on non-extrapolated losses.

[70] Edgar Dunn & Co, supra note 56, at 23.

[71] Id.

[72] Chan, et al., supra note 59.

[73] Companion Cards Increase Credit Card Rewards, Mozo, (Dec. 8, 2009),

[74] Designatton Under the Payment Systems (Regulation) Act 1998, Designation No 1 of 2015, Reserve Bank of Australia, (Oct. 18, 2015), available at

[75] Standard No. 1 of 2016, The Setting of Interchange Fees in the Designated Credit Card Schemes and Net Payments to Issuers, Reserve Bank of Australia, (May 26, 2016), amended version available at

[76] C2: Market Shares of Credit and Charge Card Schemes, Reserve Bank of Australia, (March 2019),

[77] George Lekakis, Amex and Diners Claw Back Market Share, Banking Day, (Dec. 8, 2021),

[78] Statistics, Credit and Charge Cards – Market Shares of Card Schemes – C1.3, Reserve Bank of Australia, available at

[79] Id.

[80] See Zywicki, et al., Price Controls, supra note 2, at 18-22; see also Vladimir Mukharylyamov and Natasha Sarin, The Impact of the Durbin Amendment on Banks, Merchants, and Consumers, Faculty Scholarship at Penn Law, (January 2019), at 34-35; Tom Ankana, Consumer Payment Preferences and the Impact of Technology and Regulation: Insights From the Via Payment Panel Study, Federal Reserve Bank of Philadelphia Consumer Finance Institute, Discussion Paper DP 19-01, (February 2019).

[81] Ankana, supra note 80, at 11.

[82] See Sergei Koulayev, Marc Rysman, Scott Schuh, & Joanna Stavins, Explaining Adoption and Use of Payment Instruments by US Consumers, 47 Rand J. of Econ. 293 (2016). Kloulayev, et al., also note the same trends associated with higher and lower education levels.

[83] EY/CE study, supra note 48 at 135.

[84] Id.

[85] Id. at 139-140.

[86] Id. at 140-141.

[87] Scott Schuh, Oz Shy, & Joanna Stavins, Who Gains and Who Loses From Credit Card Payments? Theory and Calibrations, Federal Reserve Bank of Boston, Research Department Public Policy Discussion Paper No. 10–3, (August 2010).

[88] Among the rare exceptions are globally traded commodities like oil; changes in the price of crude oil are fully reflected in the price of diesel within four weeks. See Erwan Gautier, Magali Marx, & Paul Vertier, How do oil prices pass through to fuel prices?, Eco Notepad, (Oct. 14, 2021),

[89] Thomas Bittmann, Jens-Peter Loy, & Sven Anders, Product Differentiation and Cost Pass-Through: Industry-Wide Versus Firm-Specific Cost Shocks, 64 Aust J Agric Resour Econ. 1184–1209, (Sep. 6, 2020),

[90] EY/CE study supra note 48, at 169-170; RBB Economics study, supra note 50.

[91] Ian Lee, Geoffrey A. Manne, Julian Morris, & Todd J. Zywicki, Credit Where It’s Due: How Payment Cards Benefit Canadian Merchants and Consumers, and How Regulation Can Harm Them, Macdonald-Laurier Institute, (2013), at 27.

[92] Iranzo, et al., supra note 27.

[93] Iranzo, et al., supra note 27 at 34-37.

[94] Kateryna Occhiutto, The Cost of Card Payments for Merchants, Reserve Bank of Australia Bulletin, (March 2020).

[95] Inflation Calculator, Reserve Bank of Australia,

[96] This is consistent with theory. See Wright, supra note 22.

[97]Australian Merchant Acquiring and Cards Markets: Special Question Placement Report, prepared by East & Partners for the Reserve Bank of Australia, (December 2010).

[98] Crystal Ossolinski, Tai Lam, & David Emery, Changing Way We Pay: Trends in Consumer Payments, Reserve Bank of Australia, (June 2014), available at

[99] Todd J. Zywicki, Geoffrey A. Manne, & Kristian Stout, Behavioral Economics Goes to Court: The Fundamental Flaws in the Behavioral Law & Economics Arguments Against No-Surcharge Law, 82 Mo. L. Rev. 822, (2017).

[100] See also Stillman, et al., supra note 60, at 25–26, citing survey evidence from 2004–07 indicating that surcharges ranged from 15 to 81 basis points higher than the merchant-service charge.

[101] Competition and Consumer Amendment (Payment Surcharges) Act 2016 (Austl.).

[102] Payment Systems (Regulation) Act 1998 Standard No. 3 Of 2016, Scheme Rules Relating to Merchant Pricing for Credit Debit and Prepaid Card Transactions. Reserve Bank of Australia, (May 26, 2016), available at

[103] ACCC Enforcement of Credit Card Surcharging Laws, Australian Federation of Travel Agents, available at

[104] Cameron Dark, Chay Fisher, Kim McBey, & Ed Tellez, Payment Surcharges: Economics, Regulation and Enforcement, Reserve Bank of Australia Bulletin, (December 2018), available at

[105] Zhu Wang, Scarlett Schwartz, & Neil Mitchell, The Impact of the Durbin Amendment on Merchants: A Survey Study, 100(3) Econ. Q. 183, (2014) (3rd Quarter). Some merchants saw their acceptance costs increase because, prior to Dodd-Frank’s price controls, some merchants, especially smaller merchants, had received discounts on acceptance costs. But the imposition of price ceilings also effectively created a price floor, leading some merchants to pay higher fees than previously.

[106] EY/CE study, supra note 48, at 170.

[107] 66% of 45% is 30%.

[108] The Household Finance and Consumption Survey: Results From the 2017 wave, European Central Bank, No. 36, (March 2020).

[109] Review of Card Payments Regulation Issues Paper, Reserve Bank of Australia, (March 2015),

[110] Olivia Gee, Debit Cards vs EFTPOS, Mozo, (Sep. 9, 2021),; EFTPOS’ 2021 annual report asserts that the system will be ready for ecommerce by May 2022. See EFTPOS Annual Financial Report, EFTPOS, (2021), available at, at 8.

[111] Lance Sinclair Blockley, Expert Industry Opinion in Relation to the Application to the Australian Competition and Consumer Commission for Authorisation of the Proposed Amalgamation of BPay Group Pty Limited and BPay Pty Ltd, EFTPOS Payments Australia Limited and NPP Australia Limited, Australian Competition and Consumer Commission, (Mar. 18, 2021).

[112] Competition in the Australian Financial System, Inquiry Report, Productivity Commission, (2018), at 471.

[113] EY/CE study, supra note 48, at 61.

[114] Todd J. Zywicki, Durbin’s Innovation Killer: The Durbin Amendment Would Raise Costs for Consumers, Increase Fraud, and Kill Innovation, The American (Jun. 11, 2011),

[115] Jonathon Reinisch, Swipe Freeze: How the Durbin Amendment Is Preventing Your Mobile Phone From Replacing Your Wallet, 63 DePaul L. Rev. 123, (2013), at 137.

[116] Zywicki, supra note 114.

[117] Tanay Jaipuria, Fintech and Regulatory Arbitrage: Understanding the The Durbin Amendment, Tanay’s Newsletter, (May 24, 2021),

[118] Bank Fees: Federal Banking Regulators Could Better Ensure That Consumers Have Required Disclosure Documents Prior to Opening Checking or Savings Accounts, U.S. Government Accountability Office, (January 2008), available at, at 15.

[119] Mukharlyamov & Sarin, supra note 54, at 37.

[120] Id., at 30.

[121] See Zywicki, et al., Price Controls, supra note 2.

[122] 2009 FDIC National Survey of Unbanked and Underbanked Households, Federal Deposit Insurance Corporation, (2009),, at 25; How America Banks: Household Use of Banking and Financial Services, Federal Deposit Insurance Corporation, (2019),, at 2.

[123] On the eve of Dodd-Frank’s enactment, the 2009 FDIC report found only 6.3% of consumers said “service charges too high” was a reason why they did not have a bank account (FDIC 2009, supra note 122). There were some changes in how the survey questions were asked over time that makes it difficult to compare precise figures, although the trend lines appear clear.

[124] Mukharlyamov & Sarin, supra note 54, at 30.

[125] Id.

[126] Schuh, et al., supra note 87.

[127] The authors’ analysis applies to credit cards, not debit cards. But oddly, they assume that the annual fee on credit cards would remain the same after imposing interchange-fee price controls. Experience in Australia and elsewhere reveals this assumption to be completely unfounded. See Chan, et al., supra note 59.

ICLE White Paper

Credit Cards and the Reverse Robin Hood Fallacy: Do Credit Card Rewards Really Steal from the Poor and Give to the Rich?


News consumers have been treated to a litany of stories in recent years highlighting the purportedly regressive nature of credit-card rewards programs. The coverage centers on a hypothesis about rewards credit cards: that because merchants pay higher interchange fees for credit cards with rewards and then pass those costs on to consumers, it must be the case that users of cash, debit, and non-rewards credit cards effectively subsidize users of rewards credit cards. This hypothesis presumes that users of rewards credit cards tend to be more affluent than those who pay with cash, debit, or non-rewards cards. It is therefore asserted that this arrangement constitutes a transfer of wealth from poorer consumers to more affluent consumers. As newspaper and website headlines declare:

  • “The ugly truth behind your fancy rewards credit card: America’s poor foot much of the bill for credit card points, miles, and cash back”;
  • “How credit card companies reward the rich and punish the rest of us”;
  • “America’s poor subsidize wealthier consumers in a vicious income inequality cycle: the less money you have, the more you spend to just be able to use money”;
  • “How Much Credit Card Rewards Cost the Poor”;
  • “Payment Choices Reverse Robin Hood Effect”;
  • “The Credit-Card Fees Merchants Hate, Banks Love, and Consumers Pay: Growing and largely hidden interchange economy creates ‘a giant reverse Robin Hood’”.

It isn’t just the consumer press that has explored this “reverse Robin Hood” hypothesis. Two working papers from authors at the Federal Reserve Bank of Boston, from 2010 and 2020, likewise argue that credit-card-rewards programs largely benefit higher-income consumers at the expense of lower-income consumers. In response, there have been calls for regulatory intervention in order to redress the harms felt by lower-income consumers due to these supposedly unfair practices.

It is a fundamental feature of retail consumer markets that not every consumer gains the same amount from every amenity or service offered by a merchant. For example, “free parking” at a grocery store or shopping mall benefits wealthier people who are more likely to own cars than lower-income people who do not. Higher-income people are more likely to earn free trips using frequent-flyer miles than lower-income people who travel less. Simply because higher-income people may benefit more than lower-income people from a retailer’s loyalty program or some other benefit does not automatically suggest the presence of a market failure or a need for regulatory intervention.

This paper considers the evidence for and against the reverse Robin Hood hypothesis. Much like the original Robin Hood narrative, it is a moralistic story in which one income group benefits at the expense of another. In the original story, the outlaw Robin Hood and his Merry Men rob from the rich and give to the poor. In the “reverse Robin Hood” story, credit-card companies rob from the poor users of cash and give to the rich users of credit cards. But there are real problems with this story. Indeed, the reverse Robin Hood may be more mythical than the original Robin Hood.

Part I describes a strong form of the reverse Robin Hood hypothesis in more detail, focusing on studies published by the Brookings Institution and the Boston Federal Reserve Bank. Despite the popularity of this hypothesis, and the seeming endorsement from scholars, there are many problems with the reverse Robin Hood narrative that should be understood before it used as the basis for public policy. Part I breaks down the hypothesis into a series of conjectures which are considered later in the paper.

Part II subjects this strong form of the reverse Robin Hood hypothesis to economic scrutiny. First, the economics of multisided markets is introduced to provide a basic framework to understand the operation of credit-card networks and the roles played by interchange fees and rewards programs. This framework helps explain that all participants in the credit-card ecosystem benefit from its establishment of complex relationships. Sometimes, this means participants on one side of the platform, such as merchants, pay charges that are used to provide benefits to another side of the platform, such as consumers. But doing so often ultimately benefits participants on the side that pays—for example, by increasing their sales sufficiently that net income increases despite the additional cost. Mandating changes to one part of the system—for example, by capping credit-card interchange fees—could affect other platform participants in unexpected ways, including by reducing benefits to consumers, who make fewer purchases, which results in lower net income for merchants.

Second, the logic of the reverse Robin Hood hypothesis is analyzed in light of those economic principles, as well as the system’s empirical realities. Implicit to the conjectures that make up the reverse Robin Hood hypothesis are a number of propositions that must be true for the hypothesis to be upheld. Two main observations falsify the hypothesis. First, merchants are not able to pass on all costs to consumers. Second, the availability of rewards cards is more tied to credit ratings than to income, which means that even those with lower incomes do benefit from the use of rewards cards.

Part III considers a weaker form of the reverse Robin Hood hypothesis from a 2020 Boston Fed Study. This study attempts to establish regressivity by positing a larger “net pecuniary cost” as a percentage of transaction value for lower-income consumers compared to higher-income consumers. But to do so, it must assume a pass-through rate of merchant costs that is inconsistent with known estimates from the empirical literature. While it may be the case that wealthier rewards-card users benefit even more from rewards than those who use them less, this hardly means that there is a harm that demands regulation, any more than it would make sense to regulate access to parking lots because car owners may tend to be wealthier on average than those who commute by public transportation.

Finally, the brief considers the likely distributional effects of proposed legislative or regulatory action to target credit-card interchange fees. Specifically, Part IV considers the evidence related to merchant pass-through of interchange-fee caps in the form of lower prices for consumers, as well as the likely ways banks and other card issuers would adapt to any such fee caps. If the experience with caps on debit card fees under the Durbin Amendment is any indication, the benefits of interchange-fee caps will be much smaller than the costs to consumers, especially lower-income consumers.

Read the full issue brief here.

ICLE Issue Brief

Issue Spotlight: Two-Sided Markets

The Issue

When buyers and sellers use a platform, broker, or other intermediary to exchange offers to buy or sell goods and services, we say that this market is “two-sided.” Recognizing that a market is two-sided has vital implications for antitrust analysis and can drastically alter the competitive appraisal of a case. Due to the complex dynamics unique to two-sided markets, conduct that may appear anticompetitive when the effects on only one set of customers is considered may prove to be entirely consistent with—and actually promote—healthy competition when the effects on both sides are examined.

Price Controls on Payment Card Interchange Fees: The U.S. Experience


In 2009, the U.S. Congress passed the “Durbin Amendment” to the Dodd-Frank financial reforms. In October 2011, the Durbin Amendment was implemented by a Federal Reserve rulemaking that effectively halved the debit card “interchange fee” that may be charged by banks with over $10 billion in assets. This paper assesses the emerging data on Durbin’s effects and provides an in-depth review of the actual U.S. experience with the Durbin Amendment.

The paper begins with a brief discussion of the role and benefits of payment cards. It then proceeds to a description of the Durbin Amendment’s interchange fee caps, followed by an assessment of the effect of the caps on bank customers, comparing the differential effect on customers of banks subject to the caps versus those that are not subject to them. This leads to a discussion of the wider effect of the caps, with particular focus on the effect on poorer households, on the quality of banking services, and on the usage of different types of payment cards.

ICLE White Paper

The Economics of Payment Card Interchange Fees and the Limits of Regulation


Fresh off of the most substantial national liquidity crisis of the last generation and the enactment of sweeping credit card regulation in the form of the Credit CARD Act, Congress continues to deliberate, with a continuing drumbeat of support from lobbyists, a set of new regulations for credit card companies. These proposals, offered in the name of consumer protection, seek to constrain the setting of “interchange fees”— transaction charges integral to payment card systems—through a range of proposed political interventions. This article identifies both the theoretical and actual failings of such regulation. Payment cards are a secure, inexpensive, welfare-increasing payment mechanism largely unlike any other in history. Rather than increasing consumer welfare in any meaningful sense, interchange fee legislation represents an attempt by some merchants to shift costs away from their businesses and onto card issuing banks and cardholders. In particular, bank-issued credit cards offer a dramatic improvement in the efficiency and availability of consumer credit by shifting credit risk from merchants onto banks in exchange for the cost of the interchange fee—currently averaging less than 2% of purchase value. Merchants’ efforts to cabin these fees would harm not only consumers but also the merchants themselves as commerce would depend more heavily on less-efficient paperbased payment systems. The consequence of interchange fee legislation, as Australia’s experiment with such regulation demonstrates, would be reduced access to credit, higher interest rates for consumers, and the return of the much-loathed annual fee for credit cards. Interchange fee regulation threatens to constrain credit for consumers and small businesses as the American economy begins to convalesce from a serious “credit crunch,” and should be accordingly rejected.

ICLE White Paper