A Closer Look at Payment Cards
39 Pages Posted: 24 Feb 2016
Date Written: February 22, 2016
This essay takes a closer look at the U.S. payment card system, primarily debit cards. I examine the bundle of transactional services this and other types of payment cards provide. My goal, in large part, is to assess the competitive effects of the debit card interchange fee cap under the Durbin Amendment to the Dodd-Frank Act (2011). In addition to a binding fee cap, it mandated a change in the way the fee is metered. A maximum per transaction fee of 20 cents, binding for most transactions, replaced a typical two-percent negotiated fee. I test hypothesis that the cap caused or contributed to a decline in the willingness of payment card intermediaries to invest in security, possibly increasing the system’s vulnerabilities to the kind of data breaches that have become ever more commonplace.
Keywords: consumer protection, data breach, debit card, Dodd-Frank Act, Durbin Amendment, Federal Reserve, interchange fees, open-loop system, payment card system, price ceiling, two-sided market
JEL Classification: D18, G21
Suggested Citation: Suggested Citation