Competing Payment Schemes

Abstract

This paper presents a model of competing payment schemes. Unlike previous work on generic twosided markets, the model allows for the fact that in a payment system one type of user (merchants) competes to attract users on the other side of the market (consumers who may use cards for purchases). It analyzes how competition between card associations affects the choice of interchange fees, and thus the structure of fees charged to cardholders and merchants. Implications of the analysis for the competitive neutrality, or otherwise, of proposals to regulate interchange fees are discussed.