July 2017

The Impact of Price Controls in Two-sided Markets: Evidence from US Debit Card Interchange Fee Regulation

Mark D. Manuszak and Krzysztof Wozniak


We study the pricing of deposit accounts following a regulation that capped debit card interchange fees in the United States and provide the first empirical investigation of the link between interchange fees and granular deposit account prices. This link is broadly predicted by the theoretical literature on two-sided markets, but the nature and magnitude of price changes are key empirical issues. To examine the ways that banks adjusted their account prices in response to the regulatory cap on interchange fees, we exploit the cap's differential applicability across banks and account types, while accounting for equilibrium spillover effects on banks exempt from the cap. Our results show that banks subject to the cap raised checking account prices by decreasing the availability of free accounts, raising monthly fees, and increasing minimum balance requirements, with different adjustment across account types. We also find that banks exempt from the cap adjusted prices as a competitive response to price changes made by regulated banks. Not accounting for such competitive responses underestimates the policy's impact on the market, for both banks subject to the cap and those exempt from it.

Accessible materials (.zip)

Keywords: Equilibrium effects, Financial supervision and regulation, Interchange fees, Retail banking and debit cards, Two-sided markets

DOI: https://doi.org/10.17016/FEDS.2017.074

PDF: Full Paper

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Last Update: January 09, 2020