Why I ran into this paper only just now I don't know. But suffice to say that once the renowned Brookings Institution bites into any subject one can only expect an analysis that does away with al the regular mumbo-jumbo on interchange fees. This excellent paper: The Economics of Interchange Fees and Their Regulation: An Overview by David S. Evans and Richard L. Schmalensee dates from July 2005 and comes up with the conclusion that neither regulators nor market players will be able to prove that a certain interchange fee is right or wrong...
In their words:
Since there is so much uncertainty about the relation between privately and socially optimal interchange fees, the outcome of a policy debate can depend critically on who bears the burden of proof under whatever set of institutions and laws the deliberation takes place. There is no apparent basis in today's economics - at a theoretical or empirical level - for concluding that it is generally possible to improve social welfare by a noticeable reduction in privately set interchange fees. Thus, if antitrust or other regulators had to show that such intervention would improve welfare, they could not do so.
(...) ...
By the same token, there is no basis in economics for concluding that the privately set interchange fee is just right. Thus, if card associations had to bear the burden of proof - for example, to obtain a comfort or clearance letter from authorities for engaging in presumptively illegal coordinated behavior - it would be difficult for them to demonstrate that they set socially optimal fees.
The only policy relevant conclusion can thus be that whoever has the power (be it legal, be it with the public, with the judge or the power of persuasion) will win the debate on interchange fees...
Which IMHO is true for both the discussion between players in the market (setting the fee) as for the discussion of market with regulators (is the fee appropriate...).
