Speaking of Josh’s co-author, David Evans, David just testified the other day before the House Financial Services Committee on a bill, the Welch Bill, HR 2382, that would regulate the fees banks charge to each other to process credit card payments. The Welch Bill is actually only one of three pending bills that would regulate interchange fees (the other two offer antitrust exemptions for merchants to negotiate these fees. Because we all know how good antitrust exemptions are).
The details on interchange fees and credit card networks are complicated (and fascinating. I may return to the topic in the near future, as it’s on my mind), but the essence is this: Credit card processing ain’t free. Meanwhile, merchants and consumers benefit enormously from the convenience and many other attributes of credit cards, and the optimal system is set up so that merchants share some of their surplus with the card issuers. Thus, a small fee for each credit card transaction (usually between 1 and 4% of the purchase, depending on the card) is charged. If they choose (and if competitive forces permit), merchants may pass these fees on to consumers in the form of higher prices (they may also price discriminate by offering a discount for cash payments, as many gas stations do). Not surprisingly (but rather short-sightedly, it seems to me), merchants aren’t so keen on these fees, and they have complained about them for a long time. Their primary claim is that these fees hurt consumers (so nice of them to look out for the little guy). In Australia they even managed to get regulation limiting interchange fees. And, why not? If I could get regulation mandating that my utility bills be cut in half . . . well, I wouldn’t want it, because I’d figure that the unintended consequences would swamp the price break.
And in Australia, that’s been the case. Basically, while interchange fees were lowered by fiat, retail prices stayed essentially flat, annual fees on credit cards increased, and card rewards were lessened. Merchants, it turns out, did fine. Consumers with credit cards and card issuers fared less well.
But this is only one piece of evidence, and Australia’s retail economy and the US’s are not identical; perhaps the effect would be different in the US. But David’s short testimony in the hearing the other day highlighted an important fact about the proponents of reform: They have no evidence to support their claims that consumers will be made better off by the reforms. There is, as I said, some evidence to suggest this would not be true. But no systematic evidence to suggest that it is true. As David’s testimony noted, it’s an extremely complex system and it’s very difficult to tell what the socially optimal fee is. Current fees may be too high. But they also may be too low. The Welch Bill would represent a wide-ranging intrusion into the operation of these complex markets. Absent evidence that this is likely to be a good thing, humility would seem warranted. But then that’s never really been Congress’ strong suit.