Double Internalization and Exchange Fee Bias
Payment platforms offerer intermediation services to consumers and merchants that interact on a product market. The merchantís bank (the acquirer) usually pays an interchange fee to the consumerís bank (the issuer) that impacts the allocation of the total transaction fee between consumers and merchants. This paper studies whether a monopolistic payment platform chooses an interchange fee that exceeds the socially optimal one when there is “double internalization”. We refer to “double internalization” as a situation in which both consumers and merchants internalize a fraction of the other sideís net costs of transacting on the platform. We show that double internalization may occur when the interchange fee impacts consumers’ decisions on the product market and compare the profit-maximizing interchange fee to the welfare-maximizing one.