Research Working Paper

The Economics of Payment Card Fee Structure: Policy Considerations of Payment Card Rewards

By Fumiko Hayashi
November 2008
RWP 08-08
Research Division
Federal Reserve Bank of Kansas City

Abstract

This paper considers possible public policies that could improve efficiency and welfare distribution in the U.S. retail payments industry. Mainly, four options, i) encouraging competition; ii) allowing merchants to surcharge; iii) regulating merchant fees; and iv) regulating payment card rewards, are discussed, but each option has advantages and disadvantages. Any single option may not achieve the policymakers' objective; rather, combining several policy options may be required.

Key words: Payment card rewards, merchant fees, competition policies, regulations

JEL Classification Numbers: L51, D63

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