Peter Guidi's Blog

Increasing Debit Fees and the two sided market, the peculiar asymmetrical structure of payment card pricing where network competition means increased interchange fees.

In alternative payment, credit card, debit card, interchange, payment, Uncategorized on November 5, 2009 at 9:53 pm

Visa’s card brand’s fiscal year ended September 30th.  Visa reported that US Debit Sales where up 4.8% during the same period last year with an overall increase for the year if 13.2%, accounting for 6 billion debit transactions. “Digital Transactions” November 5, 2005 article entitled “Network Rivalry Sparks 10-year Quadrupling if PIN-Debit Pricing” details this increase using data compiled by the Federal Reserve Bank of Kansas City. One industry leader is quoted, “The only justification is when you have an anti-competitive business model and you can illegally fix prices”.  The question: Is he right? How is it possible for the price of debit to rise even as the use of the product also becomes more widespread? 

The payment card business is a “two-sided” market where consumers are unable to negotiate retail prices based on costs merchants pay to participate in the payment system. In a one-sided market, the consumer would be able to negotiate a lower price for a product based on payment, like a cash discount. Most people think that competition generally reduces prices. With two-sided markets, competition may yield increased costs and here’s why:

Consumers are issued Debit Cards from “issuers” (banks) and so this is the Issuer’s “inventory”. Banks need to make business decisions based on which “network” (STAR, INTERLINK, NYCE etc) they choose. The network is how the inventory gets used. As a result, networks compete for the Banks business, which in this case, means giving the “issue” more money when the card is used. The result is a higher cost to those who use the inventory. In this case the retailer, by paying higher fees to accept the card from the issuer, who is trying to maximize on the value of their inventory. This is something the retailers and banks share in common.

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