Multilateral interchange fees: Don’t throw the baby out with the bathwater

Abstract

When it comes to multilateral interchange fees (MIFs), the regulatory authorities are demonstrably inconsistent. At the same time as (erroneously) treating them like conventional cartel prices, they have also mandated an upper ceiling for them — effectively legitimising the concept. As this paper demonstrates, classifying MIFs with standard cartel pricing is a categorical error. A capped MIF is simply one ingredient of a well-functioning card payment system. Indeed, without MIFs, payments markets suffer free-rider problems and high transaction costs. To illustrate how MIFs curtail the tendency of prices to move upward, the paper examines the German ATM system before 2011. Finally, the paper argues that the current regulatory approach may lead to the demise of those European card schemes that are currently under pressure from MasterCard and Visa.