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.  I 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.

The symposium contributions, which took place on Tuesday and Wednesday, December 8 and 9, can be found HERE.

Contributors:

  • Omri Ben-Shahar (University of Chicago Law School)
  • Tom Brown (O’Melveney & Myers)
  • Bob Chakravorti (Federal Reserve Bank of Chicago)
  • Richard Epstein (University of Chicago and NYU Law Schools)
  • Joshua Gans (University of Melbourne Business School)
  • Ron Mann (Columbia University Law School)
  • Geoffrey Manne (International Center for Law & Economics and Lewis & Clark Law School)
  • Tim Muris (George Mason University School of Law and O’Melveney & Myers)
  • Allan Shampine (Compass/Lexecon)
  • Bob Stillman (CRA International)
  • James Van Dyke (Javelin Strategy & Research)
  • Joshua Wright (George Mason University School of Law)
  • Todd Zywicki (George Mason University School of Law)

We look forward to an engaged discussion in the comments to the symposium posts, and we hope all of our readers will check in frequently during the symposium and will contribute to the debate.

In This Symposium

Announcement: TOTM Blog Symposium on the Law and Economics of Credit Cards

Truth on the Market is pleased to announce its fourth blog 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 ... Announcement: TOTM Blog Symposium on the Law and Economics of Credit Cards

Reminder: The Law and Economics of Interchange Fees and Credit Cards Symposium Starts Tuesday

Just a reminder that our blog symposium begins tomorrow,  Tuesday, December 8. 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 ... Reminder: The Law and Economics of Interchange Fees and Credit Cards Symposium Starts Tuesday

Welcome: The Law and Economics of Interchange Fees and Credit Card Markets

The Law and Economics of Interchange Fees and Credit Card Markets Today marks the start of our two-day symposium on the law and economics of interchange fees and credit cards.  As I noted in my announcement, the scholarly and policy debates over interchange fees and credit card markets more generally are raging, with several bills ... Welcome: The Law and Economics of Interchange Fees and Credit Card Markets

Why Now? The Faulty Economics of Credit Card Reform

Richard A. Epstein is the James Parker Hall Distinguished Service Professor of Law at the University of Chicago, the Peter and Kirstin Bedford Senior Fellow at the Hoover Institution, and a visiting professor at New York University Law School. About four years ago, I worked for Visa in opposing the opposed limitations on interchange fees ... Why Now? The Faulty Economics of Credit Card Reform

Moving the Ball Forward: Macroeconomic Considerations

Ronald J. Mann is Professor of Law at Columbia University Law School. 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 ... Moving the Ball Forward: Macroeconomic Considerations

Seven Truths About Regulating Interchange

Robert Stillman is a Vice President in the European Competition Practice of Charles River Associates 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 ... Seven Truths About Regulating Interchange

Credit Cards in Context: Framing the Discussion

Allan L. Shampine is a Vice President at Compass Lexecon in Chicago 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 ... Credit Cards in Context: Framing the Discussion

Interchange Fees Are Not Rising: Correcting the GAO Report

Thomas Brown is a partner in O’Melveny and Myers’ San Francisco office.  Timothy J. Muris is Foundation Professor of Law at George Mason University School of Law and Of Counsel in O’Melveny & Myers’ Washington DC office. Next summer, the World Cup, the world’s most watched sporting event, marks its quadrennial return.  Although thirty-two teams ... Interchange Fees Are Not Rising: Correcting the GAO Report

The Economics of Payment Cards: Six Lessons from the Literature

Sujit ‘Bob’ Chakravorti is a senior economist in the financial markets group at the Federal Reserve Bank of Chicago. Disclaimer: These views are my own and not those of the Federal Reserve Bank of Chicago or the Federal Reserve System.  Much of this discussion is taken from my paper titled “Externalities in Payment Card Networks: ... The Economics of Payment Cards: Six Lessons from the Literature

What happened in Australia?

Joshua Gans is the foundation Professor of Management (Information Economics) at the Melbourne Business School, University of Melbourne. 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 ... What happened in Australia?

Regulating Interchange Fees will Promote Term Repricing that will be Harmful to Consumers and Competition

Todd J. Zywicki is Foundation Professor of Law at George Mason University School of Law. 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 ... Regulating Interchange Fees will Promote Term Repricing that will be Harmful to Consumers and Competition

The Myth of Consumer Protection Through Disclosure

Omri Ben-Shahar is the Frank and Bernice J. Greenberg Professor of Law at the University of Chicago. 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. ... The Myth of Consumer Protection Through Disclosure

Interchange Legislation as Counterproductive Consumer Protection Regulation

Joshua D. Wright is Assistant Professor of Law and George Mason University School of Law. 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 ... 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

Welcome to Day Two

The Law and Economics of Interchange Fees and Credit Card Markets Welcome to day two of of our two-day symposium on the law and economics of interchange fees and credit cards. 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 ... Welcome to Day Two

Debunking the "Cross-Subsidy" Theory

(NB:  We have consulted with Visa U.S.A. Inc. on a variety of issues; the views expressed herein are our own.) 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 ... 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

Disclaimer: These views are my own and not those of the Federal Reserve Bank of Chicago or the Federal Reserve System.  Much of this discussion is taken from my paper titled “Externalities in Payment Card Networks: Theory and Evidence” presented at the Federal Reserve Bank of Kansas City’s 2009 Retail Payments Conference. Generally, merchants charge ... 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

Interchange Fees Symposium E-Book

Over at the International Center for Law and Economics website we’ve posted a link to a pdf e-book version of the collected content (including both posts and comments) from our recent “Interchange Fees and the Law and Economics of Credit Cards” symposium.  Head on over and download a copy if you’re interested in a dead ... Interchange Fees Symposium E-Book

The Economics and Regulation of Payment Card Interchange Fees: Paper and Conference

Two related items from ICLE: As regular readers know, interchange fees are a frequent topic of conversation around the blog.  Taking the conversation from the ether to the real world, ICLE has funded a white paper and is putting on a conference next week on the topic.  The conference, in fact, grows out of the ... The Economics and Regulation of Payment Card Interchange Fees: Paper and Conference