Finance charges are one thing, but annual fees are another. People who use credit cards for payment but not credit hate annual fees above all else.

It’s quite possible that a lot of the cross-subsidy goes from consumers who pay the finance charges to those who pay off in full in month. The situation can’t be analyzed as though consumers have a monolithic interest.

1. The claim about pass-through that you make here is as if we are talking about a one-sided market. So is the claim about “faith in markets.” While the interchange fee is certainly a cost of the merchant, and there may even be some pass through in the form of lower product prices (do we have any evidence of this?), because we are in a two sided market that analysis is incomplete. Consider the equivalent claim that supermarket collusion to reduce competition on free parking services by 20% in each parking lot would certainly reduce supermarket costs, and some of this might be passed through, but the normative impact of the collusion would be pretty clear since the increased monopoly rents are sure to more than offset the pass-through.

2. With interchange, the point is that the reduction is not just a reduction in cost but also reduces the ability to balance both sides of the market and that has a cost. The other cost is the likely increase in finance charges, annual fees or other charges. You don’t dispute this point. You should want us to consider the pass through on product prices before drawing normative conclusions. That’s fair.

But on that point, I don’t understand how your argument that consumers could simply avoid increases in annual fees (I understand with respect to interest rates, but one has to have very little faith in the profit-maximizing abilities of Visa and MC to think they don’t understand it too). Its also important to note that an increase in annual fees will also reduce an important development that has benefited consumers: the ability to simultaneously carry multiple cards at a low or even negative price.

4. I’m all for factoring the benefits of pass-through of the fees in the form of lower product prices to the extent it exists. But we cannot simply assume a reduction would operate like a decrease in merchants’ electricity bills. But again, I’d like to see evidence of pass through to product prices if it exists.