Optimal Payment Cards' Fees: A Credit-Debit Comparison

16 Pages Posted: 8 Dec 2011

Date Written: March 25, 2008

Abstract

Credit card rebates, which are paid to all credit card users regardless of borrowing, have grown substantially. This paper analyzes the optimal interchange fees in credit cards relative to the interchange fees in debit cards. Compared to debit cards, credit cards raise efficiency by allowing convenient borrowing, but also tax nonholders in order to finance the rebates paid to credit card users. A welfare enhancing and legally feasible policy is suggested, under which the regressive tax is cancelled while the efficiencies of credit cards are preserved. An outcome of the proposed policy is that credit cards are used for credit purposes only, while debit cards are used as a convenient payment instrument.

Keywords: Antitrust, Interchange Fees, Payment Cards

JEL Classification: D43, K21, L11, L41

Suggested Citation

Eilat, Assaf, Optimal Payment Cards' Fees: A Credit-Debit Comparison (March 25, 2008). Available at SSRN: https://ssrn.com/abstract=1969610 or http://dx.doi.org/10.2139/ssrn.1969610

Assaf Eilat (Contact Author)

Compass Lexecon ( email )

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8th Floor
Washington, DC 20005
United States

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