This paper analyzes optimal pricing of payment cards and welfare consequences of payment card competition. In particular, we model competition between debit and credit cards. The paper argues that equilibrium consumer and merchant fees must take safety, income uncertainty, default risk, and the merchant’s handling cost of cash into account. Market segmentation in which both debit and credit cards are supplied yields a preferred “payment mix” for consumers and merchants. However, when markets are segmented, payment card fees do not necessarily reach their socially efficient levels. Hence, thoughtful regulatory intervention regarding merchant fees may be necessary to raise total surplus. Our analysis may provide useful recommendations for market design and policy options regarding the realization of the Single Euro Payments Area (SEPA).