Zywicki on Interchange Fee Legislation

Josh Wright —  5 January 2010

My colleague (and TOTM Credit Card Symposium participant — posts here and here) Todd Zywicki has an excellent op-ed in the Wall Street Journal today on Congressional legislation aimed at regulating interchange fees.  Here’s an excerpt detailing the predictable economic consequences of the legislation:

What would happen if the Merchants Payments Coalition gets its way and politicians squeeze interchange fees? Credit cards are essentially a closed economic system: A reduction in interchange fees will have to be offset by increased revenues elsewhere or a reduction in costs. For example, issuers could try to increase the revenue generated from consumers through higher interest payments, higher penalty fees, or reinstating annual fees.

Card issuers might also reduce the quantity and quality of credit cards by restricting credit availability and cutting back on product innovation or ancillary card benefits. This is exactly what happened when Australian regulators imposed price controls on interchange fees in 2003: Annual fees increased an average of 22% on standard credit cards and annual fees for rewards cards increased by 47%-77%. Card issuers also reduced the generosity of their reward programs by 23%. Innovation, especially in terms of improved security and identity-theft protection, was stalled. Card issuers also increased their efforts to attract higher-risk customers who generate interest and penalty fees to offset lower interchange revenues from lower-risk transactional users.

Todd also exposes the weak “cross-subsidy” objection to interchange (see, e.g., here):

Merchants also contend that the current regime forces cash purchasers to subsidize credit card users through higher prices. But federal law expressly permits merchants to give cash discounts (and some do). Moreover, cross-subsidies are ubiquitous in the economy. Newspaper advertisers subsidize readers, and Starbucks’ customers who drink their coffee black subsidize those who use cream and sugar. Consumers who pay full price subsidize those who buy the same product on sale, and free parking benefits drivers but not bus riders.

There is no free lunch for interchange fees or anywhere else. But if groups like the Merchants Payments Coalition have their way, consumers may soon find their lunch more expensive if they pay with a credit card.

Readers interested in this topic can check out the posts from our credit card symposium conveniently collected here.

2 responses to Zywicki on Interchange Fee Legislation


    A nit, but I don’t think that newspaper advertisers/readers is a “cross subsidy” in the same sense. Newspapers are a two-sided market, with advertisers buying eyeballs and readers buying information (along with possibly interesting advertisements). Each is paying for their respective products, and sharing (perhaps not equitably) the overall cost of the two products.

    Starbucks is a more apt example here, although the newspaper one might be if one were arguing that CC customers were cross-subsidizing banks or vice-versa.

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  1. TRUTH ON THE MARKET » Credit card annual fees and the self-appointed consumer protectors - January 6, 2010

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