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Allocating the Costs of Fraud

TOTM I take to heart Jim’s claim that fraud is too-little discussed in this realm given its cost, and thus I’ll try my hand at it. . . .

I take to heart Jim’s claim that fraud is too-little discussed in this realm given its cost, and thus I’ll try my hand at it.

Every discussion of the industrial organization of credit card networks owes a debt to Bill Baxter.  Baxter, a law professor and former Assistant Attorney General in the Antitrust Division of the DOJ, was one of the first (maybe the first?) scholars to discuss the economics of two-sided markets, in a paper, as it happens, on the economics of interchange fees in credit card networks.

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Financial Regulation & Corporate Governance

Debunking the “Cross-Subsidy” Theory

TOTM In our earlier post, we observed that the GAO report on interchange got off on the wrong foot when it concluded that interchange fees were . . .

In our earlier post, we observed that the GAO report on interchange got off on the wrong foot when it concluded that interchange fees were rising.  We infer from the silence which greeted our post that everyone agrees with this criticism.  Indeed, yesterday’s posts and comments appear to agree that the GAO’s report does very little to advance the discussion of interchange or the cost of electronic payment.  But we suspect that greater disagreement lies just around the corner.

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Financial Regulation & Corporate Governance

The Merchants’ Insincere Concern About Cross-Consumer Subsidies

TOTM In my first post I argued that consumers as a group would likely be made worse off as a result of artificially imposed reductions in interchange fees.  . . .

In my first post I argued that consumers as a group would likely be made worse off as a result of artificially imposed reductions in interchange fees.  This post considers a second line of attack—that even if consumers overall would be made no better off (or even worse off) as a result of regulating interchange fees, Congress should intervene in the name of “fairness” to regulate interchange fees.  This “fairness” argument, however, is a red herring, especially when advanced by merchants purporting to speak for consumers.  Indeed, the sincerity of the merchants’ concern is belied by their own behavior.

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Financial Regulation & Corporate Governance

Surcharging and Honor-All-Cards

TOTM Generally, merchants charge the same price regardless of the type of payment instrument used to make purchases. In many jurisdictions, merchants are not allowed to . . .

Generally, merchants charge the same price regardless of the type of payment instrument used to make purchases. In many jurisdictions, merchants are not allowed to add a surcharge for payment card transactions because of legal (some states in the U.S. do not allow surcharges) or contractual (card networks generally do not allow surcharges) restrictions. But, merchants may be permitted to offer discounts for noncard payments. Economic models of payment cards generally conclude that social welfare improves if merchants set prices based on payment instrument used.

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Financial Regulation & Corporate Governance

Interchange fees and other rules

TOTM The GAO report raises concerns about card association the level of interchange fees (that acquirers pay issuers for credit card transactions processed) but also about . . .

The GAO report raises concerns about card association the level of interchange fees (that acquirers pay issuers for credit card transactions processed) but also about other card association rules such as the ‘no surcharge rule.’ That rule prevents a merchant who accepts card transactions from charging a ‘point of sale’ premium to consumers who use a card rather than using cash or checks. However, while the report deals with concerns about each issue individually, what is not recognised is that concerns are related. From the perspective of economics, if you deal with no surcharge rules (by eliminating them) there is a diminished and perhaps non-existent case for regulating interchange fees.

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Financial Regulation & Corporate Governance

The Cost of Payments Interchange: Issues No One Talks About

TOTM I feel that at least two important issues are being left out of the raging controversy over the cost of interchange. (At this point my . . .

I feel that at least two important issues are being left out of the raging controversy over the cost of interchange. (At this point my readers are probably deciding if I’ll follow with a pro-merchant or pro-bank POV…but guess what: here comes one of each to make my point that we’re being a bit simplistic in this debate!).

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Financial Regulation & Corporate Governance

Assessing the Social Effects of the Use of Credit Cards

TOTM The GAO has a fairly extensive discussion of the costs and benefits of credit cards to merchants.  However, that discussion focuses on the individual benefits.  . . .

The GAO has a fairly extensive discussion of the costs and benefits of credit cards to merchants.  However, that discussion focuses on the individual benefits.  I would like to step back and put two of those benefits – increased merchant sales and fraud prevention costs – into the larger context that I discussed earlier.

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Financial Regulation & Corporate Governance

The Fee Neutrality Claim

TOTM Will reduction in interchange fees help or hurt consumers? Two posts yesterday made the conjecture that a reduction in one category of fees would only . . .

Will reduction in interchange fees help or hurt consumers? Two posts yesterday made the conjecture that a reduction in one category of fees would only increase other fees, and that the overall sum of fees will not change. This is the fee-neutrality claim. Todd Zywicki writes…

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Financial Regulation & Corporate Governance

Competitive Payments

TOTM Most of the discussion related to pricing at the point of sale has emphasized the “cross-subsidy” between those that pay with cash and checks and . . .

Most of the discussion related to pricing at the point of sale has emphasized the “cross-subsidy” between those that pay with cash and checks and those that pay with credit cards.  This discussion misses the core of the problem in a market where the use of cash and checks is rapidly declining; the central problem is the differential pricing of different card products.  The reaction of the card networks to their “loss” in the debit-card and American Express litigation was to create two new product lines (Visa Signature and World MasterCard) that have unusually high interchange fees, 1-2% higher than typical Visa and MasterCard products.  The rationale for these products from the network’s perspective is two-fold.  First, the increased interchange revenues compensate for lowered interchange revenues on debit-card transactions.  Second, issuers collect higher interchange revenues and thus would not shift their business out of Visa and MasterCard and toward American Express.

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Financial Regulation & Corporate Governance