Symposium
Apr 03, 2013
The Law & Economics of Interchange Fees Symposium
The Law and Economics of Interchange Fees and Credit Card Markets
For the uninitiated, the interchange fee is the fee charged (usually) by the credit card issuing bank (the cardholder’s bank) to the credit card acquiring bank (the merchant’s bank) to settle a credit card transaction between the cardholder and the merchant. Interchange fees, as well as various rules set by credit card networks governing credit card transactions and the structure of the industry more generally have long been the subject of debate, litigation and regulation. Credit cards have been among the most successful financial innovations ever, and credit card markets are fascinatingly complex–two features leading inexorably not only to commercial disputes but also to academic dispute and scholarly attention.
As regular readers may recall, we have had a few posts on the topic, including a spirited exchange when Steve Salop was visiting a few weeks ago. We noted at the time that the topic of the regulation of interchange was interesting and timely–in fact, since then, while the then-pending bills are still pending in Congress, the GAO has issued its report on the effects of interchange fees on consumers and merchants. The GAO report notes that interchange fees have been increasing, but questions whether this leads to any viable policy responses. As the GAO notes:
Proposals for reducing interchange fees in the United States or other countries have included (1) setting or limiting interchange fees, (2) requiring their disclosure to consumers, (3) prohibiting card networks from imposing rules on merchants that limit their ability to steer customers away from higher-cost cards, and (4) granting antitrust waivers to allow merchants and issuers to voluntarily negotiate rates. If these measures were adopted here, merchants would benefit from lower interchange fees. Consumers would also benefit if merchants reduced prices for goods and services, but identifying such savings would be difficult. Consumers also might face higher card use costs if issuers raised other fees or interest rates to compensate for lost interchange fee income. Each of these options also presents challenges for implementation, such as determining at which rate to set, providing more information to consumers, or addressing the interests of both large and small issuers and merchants in bargaining efforts.
Our symposium brings together several of the world’s leading experts on interchange fees and the law and economics of credit card markets. Our participants discuss a range of issues surrounding the regulation of interchange and credit card markets.
In This Symposium
Why Now? The Faulty Economics of Credit Card Reform
About four years ago, I worked for Visa in opposing the opposed limitations on interchange fees that the Australian government was about to impose on the credit card industry. The situation there, like the situation in the United States, seemed hardly propitious for reform. The use of credit cards was rapidly expanding, and the rate ... Why Now? The Faulty Economics of Credit Card Reform
Moving the Ball Forward: Macroeconomic Considerations
What is most surprising about the GAO report is how little the analytical discussion of this subject has advanced in the last decade. We all know that interchange rates might contribute to higher retail prices: customers that use cheaper payment products can be said to “subsidize” customers that use credit cards. Starting with the Australian ... Moving the Ball Forward: Macroeconomic Considerations
Seven Truths About Regulating Interchange
Interchange fees on payment cards are obviously a hot topic in the United States, but also in Europe and in many other countries around the world. The report on interchange fees released last month by the US Government Accounting Office (GAO) notes that more than 30 countries have intervened or are considering intervening in the ... Seven Truths About Regulating Interchange
Credit Cards in Context: Framing the Discussion
While the GAO report provides a useful summary of many of the issues being debated within the credit card community, the GAO’s mandate was, in some ways, rather narrow. The GAO was asked to “review (1) how the fees merchants pay have changed over time and the factors affecting the competitiveness of the credit card ... Credit Cards in Context: Framing the Discussion
Interchange Fees Are Not Rising: Correcting the GAO Report
Next summer, the World Cup, the world’s most watched sporting event, marks its quadrennial return. Although thirty-two teams will compete in South Africa, the list of favorites begins with the two teams that have won half of the previous eighteen tournaments and three of the last four—Brazil and Italy. Brazil plays an open and flowing ... Interchange Fees Are Not Rising: Correcting the GAO Report
The Economics of Payment Cards: Six Lessons from the Literature
The proliferation of payment cards has dramatically changed the ways we shop and merchants sell goods and services. Today, payment cards are indispensable. Recent payment surveys also indicate that consumers are using payment cards instead of cash and checks. Some merchants have started to accept only card payments for safety and convenience reasons. For example, ... The Economics of Payment Cards: Six Lessons from the Literature
What happened in Australia?
What happens when you take a key price in an industry and cut it in half? For normal markets economists would expect that this would have a dramatic effect on quantity. That, however, was not the experience in Australia when the Reserve Bank of Australian (RBA) used new powers in 2003 to move Visa and ... What happened in Australia?
Regulating Interchange Fees will Promote Term Repricing that will be Harmful to Consumers and Competition
Although the mechanisms vary, legislation pending before Congress on interchange has a basic central purpose—to reduce interchange fees, either indirectly or directly. If adopted, these efforts will likely succeed in their intended goal of reducing interchange fees. But they will also likely have substantial unintended consequences that will prove harmful to consumers and competition and ... Regulating Interchange Fees will Promote Term Repricing that will be Harmful to Consumers and Competition
The Myth of Consumer Protection Through Disclosure
I will focus my blog post on one of the proposals for reducing interchange fees: the requirement that the fees be disclosed to consumers. I am not sure how seriously this option is taken by the GAO report. Indeed, the report concedes that mandated disclosures in this context are not very likely to be effective, ... The Myth of Consumer Protection Through Disclosure
Interchange Legislation as Counterproductive Consumer Protection Regulation
I want to begin with the premise that the legislation pending in Congress, in whatever form is ultimately adopted, will be successful in reducing interchange fees before turning to the question of whether such a reduction can be justified. Proponents of interchange fee legislation offer two basic defenses of the legislation. The first is as a ... Interchange Legislation as Counterproductive Consumer Protection Regulation
Onions Forever! A Response to Allan Shampine
There is nothing like the provocative post from Allan Shampine to move this debate up a notch. First, I did not say that the debate over interchange fees was Onionesque. I reserved that dubious distinction to the on-the-hand-on-the-other-hand title of the GAO report. Allan is right that the stakes are huge, which is why this ... Onions Forever! A Response to Allan Shampine
Debunking the ‘Cross-Subsidy’ Theory
In our earlier post, we observed that the GAO report on interchange got off on the wrong foot when it concluded that interchange fees were rising. We infer from the silence which greeted our post that everyone agrees with this criticism. Indeed, yesterday’s posts and comments appear to agree that the GAO’s report does very ... Debunking the ‘Cross-Subsidy’ Theory
The Merchants’ Insincere Concern About Cross-Consumer Subsidies
In my first post I argued that consumers as a group would likely be made worse off as a result of artificially imposed reductions in interchange fees. This post considers a second line of attack—that even if consumers overall would be made no better off (or even worse off) as a result of regulating interchange ... The Merchants’ Insincere Concern About Cross-Consumer Subsidies
Surcharging and Honor-All-Cards
Generally, merchants charge the same price regardless of the type of payment instrument used to make purchases. In many jurisdictions, merchants are not allowed to add a surcharge for payment card transactions because of legal (some states in the U.S. do not allow surcharges) or contractual (card networks generally do not allow surcharges) restrictions. But, ... Surcharging and Honor-All-Cards
Interchange fees and other rules
The GAO report raises concerns about card association the level of interchange fees (that acquirers pay issuers for credit card transactions processed) but also about other card association rules such as the ‘no surcharge rule.’ That rule prevents a merchant who accepts card transactions from charging a ‘point of sale’ premium to consumers who use ... Interchange fees and other rules
The Cost of Payments Interchange: Issues No One Talks About
I feel that at least two important issues are being left out of the raging controversy over the cost of interchange. (At this point my readers are probably deciding if I’ll follow with a pro-merchant or pro-bank POV…but guess what: here comes one of each to make my point that we’re being a bit simplistic ... The Cost of Payments Interchange: Issues No One Talks About
Assessing the Social Effects of the Use of Credit Cards
The GAO has a fairly extensive discussion of the costs and benefits of credit cards to merchants. However, that discussion focuses on the individual benefits. I would like to step back and put two of those benefits – increased merchant sales and fraud prevention costs – into the larger context that I discussed earlier. First, ... Assessing the Social Effects of the Use of Credit Cards
Allocating the Costs of Fraud
Geoffrey A. Manne is Executive Director of the International Center for Law & Economics and a Lecturer in Law at Lewis & Clark Law School. I take to heart Jim’s claim that fraud is too-little discussed in this realm given its cost, and thus I’ll try my hand at it. Every discussion of the industrial ... Allocating the Costs of Fraud
The Fee Neutrality Claim
Will reduction in interchange fees help or hurt consumers? Two posts yesterday made the conjecture that a reduction in one category of fees would only increase other fees, and that the overall sum of fees will not change. This is the fee-neutrality claim. Todd Zywicki writes: The mathematics of the situation is inescapable: card issuers ... The Fee Neutrality Claim
Competitive Payments
Most of the discussion related to pricing at the point of sale has emphasized the “cross-subsidy” between those that pay with cash and checks and those that pay with credit cards. This discussion misses the core of the problem in a market where the use of cash and checks is rapidly declining; the central problem ... Competitive Payments
Merchant Collusion as an Antitrust Remedy
In my first post I discussed the potential for interchange legislation from a consumer protection perspective, that is, would the combination of disclosure requirements coupled with a reduction of interchange fees be likely to improve consumer welfare. I concluded that from the consumer protection perspective, the case for interchange legislation was weak. I noted that ... Merchant Collusion as an Antitrust Remedy
The Institutional Dynamic: Understand First, Act Second—If At All
I have now had a chance to review the excellent posts on the second day, all of which have a common flavor. They expand the universe of relative considerations that need to be taken into account to decide whether imposing caps on interchange fees enhances or reduces overall social welfare. The narrow perspective on this ... The Institutional Dynamic: Understand First, Act Second—If At All
Symposium Wrap Up
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 ... Symposium Wrap Up