Payment Card Regulation and the (Mis)Application of the Economics of Two-Sided Markets


Plastic payment cards are one of the great innovations of the twentieth century.  Like the microchip, the personal computer, and the cellular telephone, payment cards have become ubiquitous after only a few decades of use, transforming the way business is conducted.  Yet, payment card companies are increasingly under attack.  In the United States, the industry has become an attractive target for the plaintiffs' bar.  Merchants throughout the world recognize the benefits of plastic, but have turned to lawsuits and regulators to reduce the associated costs.  Australia and other governments have actually imposed controls on the price that some card issuers can charge merchants.

This article considers actions against payment card companies in light of the economics of two-sided markets.  One side of the payment card market consists of the consumer and the card issuer, and the other consists of the acquirer (or an intermediary) and the merchant.  For the system to function, consumers must carry cards and merchants must accept them.  Neither side can be considered in isolation; rather, understanding the interrelation between the two is crucial.  This two-sided feature dramatically expands the challenge for those attempting to formulate sensible regulations.  Because participants on each side of the card transaction simultaneously generate costs and benefits for one another, pricing according to marginal costs (and other traditional measures of market efficiency) has little relevance.  Unfortunately, most legal interventions in the payment card industry to date have ignored the dynamics of this two-sided market.