Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153821
Authors: 
Bolt, Wilko
Foote, Elizabeth
Schmiedel, Heiko
Year of Publication: 
2011
Series/Report no.: 
ECB Working Paper 1387
Abstract: 
We consider debit and credit card networks. Our contribution is to introduce the role of consumer credit into these payment networks, and to assess the way this affects competition and equilibrium fees. We analyze a situation in which overdrafts are associated with current accounts and debit cards, and larger credit lines with ‘grace’ periods are associated with credit cards. If we just introduce credit cards, we find their merchant fees depend not only on the networks’ cost of funds and the probability of default, but also on the interest rates of overdrafts. Whilst debit card merchant fees do not depend on funding costs or default risk in a debit-card only world, this changes when they start to compete with credit cards. First, debit merchant acceptance increases with the default probability, even though merchant fees increase. Second, an increase in funding costs causes a surprising increase in debit merchant fees. Effectively, the bank offering the debit card benefits from consumers maintaining a positive current account balance, when they use their credit instead of their debit card. As a result, this complementarity may lead to relatively high debit card merchant fees as the bank discourages debit card acceptance at the margin.
Subjects: 
card competition
complementarity
consumer credit
Payment pricing
JEL: 
L11
G21
D53
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.