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TOTM I want to begin with the premise that the legislation pending in Congress, in whatever form is ultimately adopted, will be successful in reducing interchange . . .
I want to begin with the premise that the legislation pending in Congress, in whatever form is ultimately adopted, will be successful in reducing interchange fees before turning to the question of whether such a reduction can be justified. Proponents of interchange fee legislation offer two basic defenses of the legislation. The first is as a statutory substitute for a perceived failure of both markets and competition law to address the “problem” of interchange fees. Various iterations of this defense of interchange legislation rely on economic arguments that the balance of economic arrangements between merchants and cardholders chosen by Visa or MasterCard over time involves the exercise of market power and reduction of output, or on the general theory that cross-subsidization of credit card users by cash and check customers (whether or not this subsidization is a function of market power) warrants intervention. Many of the comments in this symposium focus on this dimension of the interchange debate. It is an important dimension. I will discuss the proposed legislation from an antitrust economics perspective in my second post.
Read the full piece here.
TOTM About four years ago, I worked for Visa in opposing the opposed limitations on interchange fees that the Australian government was about to impose on . . .
About four years ago, I worked for Visa in opposing the opposed limitations on interchange fees that the Australian government was about to impose on the credit card industry. The situation there, like the situation in the United States, seemed hardly propitious for reform. The use of credit cards was rapidly expanding, and the rate of interest was being brought down by competition, the number of cards in circulation had increased. What is there not to like?
TOTM While the GAO report provides a useful summary of many of the issues being debated within the credit card community, the GAO’s mandate was, in some ways, rather narrow.
While the GAO report provides a useful summary of many of the issues being debated within the credit card community, the GAO’s mandate was, in some ways, rather narrow. The GAO was asked to “review (1) how the fees merchants pay have changed over time and the factors affecting the competitiveness of the credit card market, (2) how credit card competition has affected consumers, (3) the benefits and costs to merchants of accepting cards and their ability to negotiate those costs, and (4) the potential impact of various options intended to lower merchant costs.” We will be talking a lot about their conclusions on these issues, but first I would like to set the stage by talking about where credit cards fit in the economy as a whole.
For the uninitiated, the interchange fee is the fee charged (usually) by the credit card issuing bank (the cardholder’s bank) to the credit card acquiring . . .
For the uninitiated, the interchange fee is the fee charged (usually) by the credit card issuing bank (the cardholder’s bank) to the credit card acquiring bank (the merchant’s bank) to settle a credit card transaction between the cardholder and the merchant. Interchange fees, as well as various rules set by credit card networks governing credit card transactions and the structure of the industry more generally have long been the subject of debate, litigation and regulation. Credit cards have been among the most successful financial innovations ever, and credit card markets are fascinatingly complex–two features leading inexorably not only to commercial disputes but also to academic dispute and scholarly attention.
As regular readers may recall, we have had a few posts on the topic, including a spirited exchange when Steve Salop was visiting a few weeks ago. I noted at the time that the topic of the regulation of interchange was interesting and timely–in fact, since then, while the then-pending bills are still pending in Congress, the GAO has issued its report on the effects of interchange fees on consumers and merchants. The GAO report notes that interchange fees have been increasing, but questions whether this leads to any viable policy responses. As the GAO notes:
Proposals for reducing interchange fees in the United States or other countries have included (1) setting or limiting interchange fees, (2) requiring their disclosure to consumers, (3) prohibiting card networks from imposing rules on merchants that limit their ability to steer customers away from higher-cost cards, and (4) granting antitrust waivers to allow merchants and issuers to voluntarily negotiate rates. If these measures were adopted here, merchants would benefit from lower interchange fees. Consumers would also benefit if merchants reduced prices for goods and services, but identifying such savings would be difficult. Consumers also might face higher card use costs if issuers raised other fees or interest rates to compensate for lost interchange fee income. Each of these options also presents challenges for implementation, such as determining at which rate to set, providing more information to consumers, or addressing the interests of both large and small issuers and merchants in bargaining efforts.
Our symposium will bring together several of the world’s leading experts on interchange fees and the law and economics of credit card markets. Our participants will discuss a range of issues surrounding the regulation of interchange and credit card markets.
The symposium will take place on Tuesday and Wednesday, December 8 and 9.
We look forward to an engaged discussion in the comments to the symposium posts, and we hope all of our readers will check in frequently during the symposium and will contribute to the debate.
We’ll announce the agenda and schedule no later than Monday, December 7.
Posted in announcements, business, credit cards, disclosure regulation, economics, financial regulation, interchange and credit cards symposium, law and economics, markets, politics
TOTM I will focus my blog post on one of the proposals for reducing interchange fees: the requirement that the fees be disclosed to consumers. I . . .
I will focus my blog post on one of the proposals for reducing interchange fees: the requirement that the fees be disclosed to consumers. I am not sure how seriously this option is taken by the GAO report. Indeed, the report concedes that mandated disclosures in this context are not very likely to be effective, because “consumers are likely to disregard this kind of information.” But I will not be surprised if, of all the regulatory options discussed in the report, in the end it will be the disclosure rule that is enacted.
TOTM Next summer, the World Cup, the world’s most watched sporting event, marks its quadrennial return. Although thirty-two teams will compete in South Africa, the list . . .
Next summer, the World Cup, the world’s most watched sporting event, marks its quadrennial return. Although thirty-two teams will compete in South Africa, the list of favorites begins with the two teams that have won half of the previous eighteen tournaments and three of the last four—Brazil and Italy. Brazil plays an open and flowing brand of soccer. Italy sits back and pounces when its opponents stumble. Although Brazil and Italy follow different philosophies, they have achieved similar success because both have adopted strategies to overcome the adversity that inevitably arises in a major tournament. Even a weak opponent can manage to score a single goal when a referee blows a call. But good teams find a way to overcome.
TOTM Interchange fees on payment cards are obviously a hot topic in the United States, but also in Europe and in many other countries around the . . .
Interchange fees on payment cards are obviously a hot topic in the United States, but also in Europe and in many other countries around the world. The report on interchange fees released last month by the US Government Accounting Office (GAO) notes that more than 30 countries have intervened or are considering intervening in the payment card industry.
TOTM What happens when you take a key price in an industry and cut it in half? For normal markets economists would expect that this would . . .
What happens when you take a key price in an industry and cut it in half? For normal markets economists would expect that this would have a dramatic effect on quantity. That, however, was not the experience in Australia when the Reserve Bank of Australian (RBA) used new powers in 2003 to move Visa and MasterCard interchange fees from around 0.95 percent of the value of a transaction to just 0.5 percent. The evidence demonstrates that this change was virtually undetectable in any real variable to do with that industry.
TOTM Although the mechanisms vary, legislation pending before Congress on interchange has a basic central purpose—to reduce interchange fees, either indirectly or directly. If adopted, these . . .
Although the mechanisms vary, legislation pending before Congress on interchange has a basic central purpose—to reduce interchange fees, either indirectly or directly. If adopted, these efforts will likely succeed in their intended goal of reducing interchange fees. But they will also likely have substantial unintended consequences that will prove harmful to consumers and competition and will roll-back the innovation in the credit card market over the past two decades.
