Working Paper

Interchange Fees in Payment Networks: Implications for Prices, Profits, and Welfare

Robert M. Hunt,
Konstantinos Serfes &
Yin Zhang

May 2026

WP 26-29 – This paper examines the level of a wholesale price — the interchange fee — typically set by a payment card network that influences the distribution of acceptance costs and benefits incurred or received by merchants and consumers. It offers new theoretical insights into price regulation in payments.

Supersedes Working Paper 25-18 – Interchange Fees in Payment Networks: Implications for Prices, Profits, and Welfare

We develop a two-sided model of the payment card market with elastic consumer demand, merchant and network market power, ad valorem interchange fees, cardholder rewards, and cash as an alternative payment method. Endogenously determined interchange fees and rewards create a wedge between consumer and merchant prices and influence credit card adoption, affecting equilibrium prices, profits, and welfare. Surprisingly, capping interchange fees can increase equilibrium rewards and card adoption when consumer demand is relatively inelastic. Under certain conditions, this may harm cash users. When demand is more elastic, fee caps reduce rewards and card usage, improving outcomes for both groups. We also characterize the conditions under which interchange fee caps enhance allocative efficiency and encourage socially desirable payment choices.

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Dynamic Pricing of Credit Cards and the Effects of Regulation

Suting Hong,
Robert M. Hunt &
Konstantinos Serfes

November 2021

WP 21-38 – We construct a two-period model of revolving credit with asymmetric information and adverse selection.

Payment Systems

Working Paper

An Introduction to the Economics of Payment Card Networks

Robert M. Hunt

June 2003

WP 03-10 – Open payment card networks typically coordinate the activities of thousands of financial institutions that issue cards, millions of retail locations that accept them, and several hundred million consumers that use them.