Cooperation Among Competitors: The Economics of Payment Card Associations

The paper analyzes the cooperative determination of the interchange fee by member banks in a payment card association. The interchange fee is the “access charge” paid by the merchants’ banks, the acquirers, to cardholders’ banks, the issuers. The paper develops a framework in which banks and merchants may have market power and consumers and merchants decide rationally on whether to buy or accept a payment card. After drawing the welfare implications of a cooperative determination of the interchange fee, the paper provides a detailed description of the factors impacting merchant resistance, compares cooperative and for-profit business models, and makes a first cut in the analysis of system competition. JEL Classification: G21, L31, L42