This article is a part of the The Law & Economics of Interchange Fees Symposium symposium.
Thanks to all of our participants and readers for the blog symposium–both the posts and the comments were engaging and thoughtful, and I hope these entries will be helpful in the ongoing debate over credit cards and interchange fees.
A concluding point or two:
Credit card networks are incredibly complex, and no one fully understands the full consequences of tinkering with these markets. The best empirical evidence we have is difficult to interpret, and the broad interactions among the parts of the credit card system, between cards and other payment systems, and in the macro-economy more generally are simply unknown: Richard’s do no harm principle seems like the strongest conclusion in this debate.
At worst, theory and empirical evidence suggest that lowering interchange fees does nothing to help consumers, and in fact harms them by raising annual fees and thus again by limiting competition among cards at the point of sale. Perhaps there is some policy reason why we would want to help merchants at the expense of consumers, but the issue, often framed as merchants and consumers against banks and card networks, really seems to be merchants against consumers. At best, we have no idea what the full social implications of capping interchange fees would be–but there is still a conflict between merchant and consumer interests, and we should be wary.
As I read the comments and posts in this debate, essentially all of us agree that, at minimum, there is a potential for consumer harm from government intervention in these markets. Certainly all of us engaged in this discussion–even those with a more “pro-regulatory” bent–are far more circumspect about the prospects for positive social welfare effects and effects on consumers in particular than are the proponents of regulation. I do wish our system limited the political salience of regulatory initiatives unsupported by evidence–the burden should be on the proponents of intervention to demonstrate affirmatively that regulation will likely have net positive effect. Here, this is simply not the case.
As is so often the case, Richard has the last word:
The clear upshot is that it is difficult through informed speculation to identify all the collateral consequences of running a credit card system, both positive and negative. The only sure piece of data that we have is that credit transactions have done far better than cash and checks, even if they are losing ground to the next generation of payment systems that rely on cell phones and other technologies that are untied to the now ubiquitous magnetic strip. These dynamic changes could easily force down interchange prices without the need for administrative proceedings.
The hard institutional question therefore is why concentrate major reforms on the interchange fees when all these other components must be added into the mix. On this question, priors really matter. And after reading the assembled posts, my own view is that technological innovation is a far more important driver of improvements than partial fine-tuning of the current system, whatever its flaws.
In one sense, therefore, we, the members of this blog-fest, may well be part of the problem. By putting one part of a complex payment industry under a microscope we divert resources from cost reduction measures that have unambiguously positive effects. How large a cost is this? Frankly, no one knows. But given the risks of error in implementation, the best response still seems to be, play for the next big breakthrough, and in the short run, leave well enough alone.
Thanks once again to all of our great participants, and to our readers. The full set of posts and comments from the symposium are available by clicking on the “credit card symposium” link on the right side of the TOTM page.