Determinants of Card Payments Fees in A Cross-Country Analysis¹

The March 2020 legislative decree gives the BCCR the mandate to regulate and monitor the card system, an essential part of the payment system in Costa Rica. In particular, the BCCR has the responsibility to determine the maximum fees for the card system while promoting the efficiency in processing of transactions by card companies. This paper expands the BCCR’s own cross-country analysis on the main drivers of domestic card payment fees, without taking a view on the appropriateness of the level of the regulatory limits. A comprehensive study of the country-specific determinants of card payment fees is beyond the scope of this paper.

1. A card payment involves several actors and various fees are charged. There are typically two intermediaries mediating the transaction between customers and the merchants (affiliates), namely the customer’s financial institution (card issuer) and the affiliate’s financial institution (the acquirer). The customers receive cards from the issuer, which can be debit or credit cards, enabling them to make purchases. The affiliate generates a payment authorization message at the time of the transaction, indicating the payment amount and currency. In the settlement process, affiliates pay a merchant discount rate (MDR) to their acquirer (typically banks), which consists of various fees including an interchange fee paid to the issuer and an acquirer margin paid to the acquirer. The interchange fee typically constitutes the largest proportion of the overall MDR.²

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Costa Rica: Card Payment System

Citation: IMF Staff Country Reports 2023, 443; 10.5089/9798400264924.002.A002

Source: BCCR,

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2. Legislative Decree No. 9831 (Maximum Commissions of the Card System) introduced in March 2020 gives the BCCR the mandate to regulate and monitor the card system, an essential component of the payment system. As established in Article 1 of the decree, the purpose of the law is to regulate the commissions charged by service providers on the processing of transactions with a view to promote efficiency, competition and security, while guaranteeing the lowest possible cost for affiliates. To this end, the law delegates to BCCR the responsibility of determining the maximum authorized commissions and reviewing and adjusting them at least once a year. Before the Legislative Decree No. 9831 was introduced, the highest merchant discount rate, the sum of interchange fees and acquirer margin, was 12.0 percent (with a mode and an average at 4.0 and 3.1 percent, respectively), reflecting in part a highly concentrated payment system in Costa Rica. For example, the top 3 companies accounted for 71 percent of the credit card transactions before the implementation of this law.³ The Herfindahl-Hirschman Index (HHI), a common measure for market concentration, was 3,140, above the standard of highly concentrated cases of 2,500.⁴ After the BCCR imposed maximum card payment fees following the implementation of the decree, the number of service providers and customers have both increased.

3. In its most recent review of the MDR, the BCCR used international comparison to help determine the maximum card payment fees. This paper expanded the BCCR’s analysis of fees for domestic transactions, aiming to discuss the main drivers of interchange fees and MDR in the crosscountry setting, rather than endorsing any specific levels of regulatory limits.⁵ Our cross-country regression on the fundamental determinants of the card payment fees suggests that market concentration and the profit margin of the banking sector are important contributors to high card payment fees, while development of digital payments can help reduce the fees. Our regression analysis is based on the data for 70 countries with a total of 197 observations.⁶ As for the interchange fees, the share of the population who have made or received a digital payment reduces the interchange fees at a 1 percent statistically significant level. On the other hand, the net interest margin, which captures the banks’ profit margin, and the degree of bank asset concentration can both increase the interchange fees. Although the standard errors are relatively large, partly due to the limited samples, similar results are obtained in the MDR regression.

4. The estimated interchange fee in this analysis is slightly lower compared to the results in the BCCR’s original analysis, while the MDR is almost the same. Based on the regression analysis using the international data, the corresponding interchange fee for Costa Rica is estimated as 1.06 with a 95 percent confidence interval equal to [0.91, 1.20], compared to the BCCR’s point estimate of 1.25. The estimated MDR, at 1.94, is almost the same as the results obtained by BCCR at 1.91. The commission fees set by BCCR (maximum MDR as 2.0 percent and the interchange fee as 1.5 percent) are comparable to those in other Latin America countries but are higher than in other OECD countries.⁷

5. It is worth pointing out that in many countries, a cost-based methodology is often used to determine the maximum commissions.⁸ Rather than being based on international comparisons, a cost-based methodology takes into account the specific market structure in the country by reflecting certain costs incurred by the providers of the acquiring and issuing service, but it requires market participants to submit information on their activity-based costs. Going forward, the BCCR should consider complementing the cross-country analysis with a cost-based methodology that can capture the characteristics of Costa Rica’s own payment system in determining the maximum commission fees.

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Costa Rica: Regression Results

Notes: Robust standard errors are provided in parentheses. *** p<0.01, ** p<0.05, *p<0.1. Source: Staff estimates.

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Costa Rica: Regression Results

Regression Coefficients
Variables	Interchange fee	MDR
Regulation	-0.5551 *** (0.0552)	-0.565 *** (0.1545)
ATMs	0.0019 ** (0.0008)	0.001 (0.0019)
Financial Development	0.3221 * (0.1811)	-0.540 (0.6631)
Digital Payment	-0.0102 *** (0.0023)	-0.002 (0.008)
Bank Asset Concentration	0.0033 * (0.0019)	-0.004 (0.0049)
NIM	0.0979 *** (0.0233)	0.072 (0.0393)

Notes: Robust standard errors are provided in parentheses. *** p<0.01, ** p<0.05, *p<0.1. Source: Staff estimates.

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^{Text Table 1.}

Costa Rica: Regression Results

Regression Coefficients
Variables	Interchange fee	MDR
Regulation	-0.5551 *** (0.0552)	-0.565 *** (0.1545)
ATMs	0.0019 ** (0.0008)	0.001 (0.0019)
Financial Development	0.3221 * (0.1811)	-0.540 (0.6631)
Digital Payment	-0.0102 *** (0.0023)	-0.002 (0.008)
Bank Asset Concentration	0.0033 * (0.0019)	-0.004 (0.0049)
NIM	0.0979 *** (0.0233)	0.072 (0.0393)

Notes: Robust standard errors are provided in parentheses. *** p<0.01, ** p<0.05, *p<0.1. Source: Staff estimates.

Estimated fees (percent)

Source: BCCR and Staff estimates.

Estimated fees (percent)

		Estimated results	95 % Confidence Interval
Interchange fee		1.06	[0.91, 1.20]
	BCCR result in 2022	1.25	[1.14, 1.37]
MDR		1.94	[1.40, 2.41]
	BCCR results in 2022	1.91	[1.69, 2.13]

Source: BCCR and Staff estimates.

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Estimated fees (percent)

		Estimated results	95 % Confidence Interval
Interchange fee		1.06	[0.91, 1.20]
	BCCR result in 2022	1.25	[1.14, 1.37]
MDR		1.94	[1.40, 2.41]
	BCCR results in 2022	1.91	[1.69, 2.13]

Source: BCCR and Staff estimates.

Fees of Card Payment in Other Countries (percent)

Source: The government websites in each country. The background dataset of regression analysis published by BCCR covers the URL of the websites.

Fees of Card Payment in Other Countries (percent)

Countries	Interchange fee	MDR
Latin America (OECD)	1.4	1.8
Latin America (Non OECD)	1.8	2.8
OECD (other than Latin America)	0.4	1.0

Source: The government websites in each country. The background dataset of regression analysis published by BCCR covers the URL of the websites.

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Fees of Card Payment in Other Countries (percent)

Countries	Interchange fee	MDR
Latin America (OECD)	1.4	1.8
Latin America (Non OECD)	1.8	2.8
OECD (other than Latin America)	0.4	1.0

Source: The government websites in each country. The background dataset of regression analysis published by BCCR covers the URL of the websites.