Academic journal article Economic Review (Kansas City, MO)

The New Debit Card Regulations: Effects on Merchants, Consumers, and Payments System Efficiency

Academic journal article Economic Review (Kansas City, MO)

The New Debit Card Regulations: Effects on Merchants, Consumers, and Payments System Efficiency

Article excerpt

Public authorities have recently intervened in the U.S. payment card industry to address controversy over the growing fees charged to merchants for processing debit card transactions. The interventions, by Congress and by the Department of Justice, aimed to give merchants and consumers some relief from the high fees and to promote competition within the payment card industry. The new regulations cap certain fees and give merchants more control in routing debit card transactions and in steering customers toward the payment methods that merchants prefer.

Merchants and the payment card industry took opposing sides in the controversy over fees. The merchants argued that lowering the fees through regulation would benefit consumers because the high fees charged to merchants were imposing costs on both merchants and consumers and reducing the efficiency of the nation's payments system. In the merchants' view, the high fees reduced consumer welfare because part of the burden of the fees was passed on to consumers in the form of higher prices for goods and services. Overall payment system efficiency was reduced according to the merchants because the payment card industry used some fee revenue to sustain inefficient payment methods that yielded the industry the most revenue.

The industry argued exactly the opposite: that lowering the fees assessed to merchants would reduce both consumer welfare and payments system efficiency. Consumers would likely face higher banking fees as banks sought to offset lost revenue, and overall efficiency would likely decline as consumers switched from debit cards to less efficient payment methods, such as checks.

This article is the second in a series of two that examine the effects of the new regulations on the debit card industry, merchants, and consumers. The first article found that the new regulations have had significant impacts on card networks and banks (Hayashi 2012b). The present article focuses on the regulations' effects on merchants, consumers, and overall payments system efficiency. Merchants are affected by the regulatory changes directly, while consumers and payments system efficiency are affected indirectly by the reactions of the debit card industry and merchants to the new regulations. The changes have brought some benefits to some merchants, so far, but it is too soon to know whether consumers will benefit and whether overall efficiency will rise or fall. Those outcomes will depend largely on how networks, banks, merchants, and consumers continue to adapt to the new regulatory environment in coming years.

Section I of this article provides a brief summary of the recent regulatory changes. Section II discusses the effects of the new regulations on merchants and their reactions, including changes in the way they route transactions and, in some cases, in the payment discounts they offer to consumers. Section III considers the impact on consumers resulting from both merchants' and banks' reactions to the new regulations. Section IV finds that while efficiency is likely to rise in the debit card market, efficiency overall may decline in the payments system as a whole if consumers shift from debit cards to less efficient payment methods such as checks and credit cards.


As the use of debit cards grew rapidly over the past decade and the level of debit card interchange fees charged to merchants also grew (Hayashi 2012b), tensions rose between merchants and the debit card industry. (1) The composition and channeling of the fees charged to merchants for each debit transaction can be very complex. Although the fees are set by debit card networks, such as MasterCard and Visa, they are paid to the banks that issue the debit cards.

Merchants contended that, due to competitive pressures and customer expectations, they could not reject debit cards even as interchange fees were driven higher by a lack of competition among networks for merchants. …

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