The piece that first asserted the “expensive forms of payment driving out the cheap” hypothesis was published in 1998–Alan S. Frankel, Monopoly and Competition in the Suppply and Exchange of Money, 66 Antitrust L. J. 313 (1998). Ten years on, there is simply no empirical support for the proposition that electronic payments are more expensive than legacy instruments for all transactions. Allan, your commentary Garcia-Schwartz, Hahn and Layne-Farrar does not say otherwise. It simply says that estimates of social costs of payment “should be used in policy debates only with great caution.” Id. at 508.

Shouldn’t your cautionary principle apply double (or triple) to unsupported hypothesis that do not, as we pointed out in our post, apply to all transaction environments?

Since Google will bring people to your post who may not read the comments, it would be polite of you to correct your post so that readers don’t get the wrong impression of my views.

Those are other folks’ complaints. I wrote (http://www.truthonthemarket.com/2009/12/08/moving-the-ball-forward-macroeconomic-considerations/#comments) that card issuers’ current scheme taxes merchants to fund bank marketing. The cardholder thinks he’s getting a “reward” from the card issuer, but in fact it’s coming from the merchant– who, however, gets no benefit from it, since the bank’s name is on the cheque/coupon/whatever. Ultimately, of course, all the “rewards” are funded by cardholders, though they do not reap them equally.

Banks use “rewards” like airlines use frequent-flyer programs: to differentiate themselves and promote customer loyalty in an essentially commodity business (because they rationally prefer not to compete on price or service). The difference is that airlines can’t make third parties pay for their marketing (although airlines have entered all sorts of card-issuing partnerships to merge their loyalty programs with banks’, an admirably efficient move).

I also wrote that banks collude to impose this scheme (using card network administrators to coordinate and enforce their cartel arrangements). If prevented from practicing that collusion then banks might face lower profits from card operations, but merchants and consumers (in aggregate) would be better off (of course individual consumers might gain or lose, because some pay for “rewards” that others receive and vice-versa).

I recognize that merchants might decide to accept all or nearly all cards (at the same consumer price) regardless of their different levels of interchange (passed through to merchant) fees. They would do so based, however, on their own marketing interests. I explicitly wrote before that abolishing the collusive enforcement of uniform acceptance/no-differential-pricing (“surcharging”) would allow the market to find its own balance, without the weight of collusive bank arrangements on one side of the scale.