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.