Interchange Fees Forum

The Dodd-Frank financial reform legislation requires the Federal Reserve to set interchange fees for electronic debit card transactions.  These fees are a subset of the total costs paid by merchants for the business advantages accruing from acceptance of debit cards.

In setting the interchange rate, the legislation instructs the Federal Reserve to focus on the “the incremental cost incurred by an issuer…in the authorization…of a particular electronic debit transaction….”  As a Federal Reserve Bank of Richmond publication explained, however, “It is important to distinguish between incremental and marginal costs.”  The FRB went on to explain that incremental cost is greater than marginal cost and includes some fixed costs. 

The Center for Regulatory Effectiveness has released the attached paper Understanding Marginal Costs in a Two-Sided Market: Implications for Debit Card Interchange Regulation. The paper is intended to help guide the Federal Reserve’s develeopment of regulations governing interchange fees on electronic debit transactions.

Understanding Marginal Costs in Two-Sided Markets

Thursday, November 19, 2009

GAO Study on Interchange Fees Inconclusive  By Sara Jerome

Advocacy efforts over the prospect of credit card interchange regulation have led to a gridlocked debate between retailers and credit card companies. Interchange fees are the cost stores pay to banks when customers use credit cards.

A GAO study released Thursday, which sought to cut through the fray, was pretty much a wash. Stakeholders on both sides immediately adopted certain aspects of the report into their lobbying efforts, ignoring points that weren’t so favorable.

Points supporting retailers:

Sep 30th