This paper analyzes the impact of interchange fee regulation on the investment incentives of
a payment card platform in the presence of full merchant internalization. We distinguish
between investment in consumer and retailer services. We find that the optimally regulated
interchange fee can be above the privately optimal one to induce the platform to invest more
in retailer services. We also demonstrate that the two prominent regulatory benchmarks of a
zero interchange fee and regulation according to the “tourist test” tend to set too low …