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Credit card companies play security catchup

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Mobile Commerce Trends 2010: Opportunities to Create New Revenue

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FEATURED ARTICLE:



Regulating Debit Cards: The Case of Ad Valorem Fees

The Federal Reserve Bank of Kansas City's Economic Review for 1Q2010 includes an article titled "Regulating Debit Cards: The Case of Ad Valorem Fees" by Zhu Wang. From the abstract:
Debit cards have become an indispensable part of the U.S. payments system, accounting for more than a third of consumer payments at point of sale. With this development has come controversy: Card networks charge merchants fees that merchants believe are too high. And most of the fees are ad valorem―that is, based on transaction value―rather than fixed fees per transaction.
Given that debit cards incur a fixed cost per transaction, why do networks charge ad valorem fees? How do ad valorem fees affect payment market participants, including consumers, merchants, and card networks? And should policymakers consider regulating debit cards by requiring fixed per-transaction fees?
Wang explores this controversy about debit card fee structures. His analysis shows that, when card networks and merchants both have market power, card networks earn a higher profit by charging ad valorem fees than fixed per-transaction fees. At the same time, merchant profits are reduced―yet both consumer surplus and social welfare are increased. As an alternative, policymakers might consider regulating the debit fee structure simply by requiring fixed per-transaction fees (but allowing card networks to freely set the fee levels). Wang suggests, however, that this alternative may increase merchant profits at the expense of card networks, consumers, and social welfare. Therefore, caution should be taken when policymakers consider intervening in the debit card market."  


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Posted by John B. Frank Friday, March 26, 2010

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