Regulating Competing Payment Networks

Merchants rarely price discriminate by payment method. This enables card networks like Visa to fund consumer rewards with merchant fees. I develop and estimate a model of platform competition to compare how regulation, increased network competition, and public entry affect U.S. consumer payments. I find that the current U.S. payment system is regressive and inefficient, and that network competition exacerbates these problems. I model consumer adoption and merchant acceptance of multiple cards, merchant pricing, and network competition. I estimate the model by matching data on the effects of debit rewards reductions and a large grocer’s decision to accept credit cards. The estimated model matches external evidence on networks’ costs, merchants’ margins, and the effects of AmEx’s OptBlue program on merchant acceptance. Uniform caps on merchant fees are progressive and increase annual welfare by $31 billion by reducing rewards and credit card use. Because higher income households are more likely to use credit cards, fee caps save the median household around $50 every year but cost high-income households $1000. Because consumers are reward-sensitive, but merchants are fee-insensitive, competition has the opposite effects. Few consumers adopt public options without rewards, limiting their benefits.