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Credit Cards in Context: Framing the Discussion

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.

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Financial Regulation & Corporate Governance

The Myth of Consumer Protection Through Disclosure

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.

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Financial Regulation & Corporate Governance

Regulating Interchange Fees will Promote Term Repricing that will be Harmful to Consumers and Competition

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.

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Financial Regulation & Corporate Governance

What happened in Australia?

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.

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Financial Regulation & Corporate Governance

The Economics of Payment Cards: Six Lessons from the Literature

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.

Read the full piece here.

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Financial Regulation & Corporate Governance

Interchange Fees Are Not Rising: Correcting the GAO Report

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.

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Financial Regulation & Corporate Governance

Seven Truths About Regulating Interchange

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.

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Financial Regulation & Corporate Governance

Moving the Ball Forward: Macroeconomic Considerations

TOTM What is most surprising about the GAO report is how little the analytical discussion of this subject has advanced in the last decade.  We all . . .

What is most surprising about the GAO report is how little the analytical discussion of this subject has advanced in the last decade.  We all know that interchange rates might contribute to higher retail prices: customers that use cheaper payment products can be said to “subsidize” customers that use credit cards.  Starting with the Australian initiative, regulators for a decade have sought to understand the costs of credit-card processing and to push interchange fees down to the “competitive” level of the “costs” of providing the service.  Conversely, economists writing about two-sided networks have shown that the focus on costs reflects a fundamental misunderstanding of the two-sided network, in which the interchange fee is an allocation of burden between merchants and cardholders, not a charge for services rendered to one side or the other.

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Financial Regulation & Corporate Governance

Is Google Monopolizing Something, and If So, What?

Presentations & Interviews Last June, Christine Varney, then a lawyer in private practice, now President Obama’s nominee to be the next Assistant Attorney General for Antitrust, warned that . . .

Last June, Christine Varney, then a lawyer in private practice, now President Obama’s nominee to be the next Assistant Attorney General for Antitrust, warned that Google, not Microsoft, is the monopolist of the future.  “For me, Microsoft is so last century. They are not the problem,” Varney said at a June 19 panel discussion sponsored by the American Antitrust Institute. The U.S. economy will “continually see a problem — potentially with Google” because it already “has acquired a monopoly in Internet online advertising.”  Concerns of this nature ultimately led Tom Barnett, the last Assistant Attorney General for Antitrust, to threaten a Sherman Act monopolization lawsuit if Google went through with plans to buy Yahoo.  Google, on the other hand, contends that the concerns are completely misplaced.  “The nature of the Internet is just a fundamentally different world from the sale of packaged software or the bundling of software with OEMs (original equipment manufacturers),” according to Kent Walker, Google’s General Counsel.  “The standard line we have is that competition is just one click away.”

Panelists:

  • Mr. Scott Cleland, President, Precursor LLC and Chairman, NetCompetition.org
  • Ms. Susan Creighton, Partner, Wilson Sonsini Goodrich & Rosati, PC
  • Prof. Geoffrey Manne, Founder and Executive Director, International Center for Law & Economics and Lecturer in Law, Lewis & Clark Law School
  • Mr. Rick Rule, Partner, Cadwalader, Wickersham & Taft LLP
  • Moderator: Mr. Montgomery N. Kosma, Vice President of Legal Services Outsourcing, CPA Global

Full audio is embedded below.

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Antitrust & Consumer Protection