That was the upshot of a panel I spoke at yesterday in New York at the Atlas Liberty Forum. It looked at the impact of regulation in general and in particular at the effects of credit card interchange fees.
It might seem counter-intuitive at first, but merchants who accept credit cards have always paid the credit card companies for their use, rather than vice-versa. If you want a good explanation of this, you should watch the classic Alec Guiness movie The Card, about a rakish young entrepreneur who invents an early version of a credit card, the Universal Thrift Club. In short, the merchants get more customers because of the availability of credit and the convenience of using a card, so they should pay the people who provide that boost to their custom.
But retailers, like the ones depicted in The Card, have always balked at that notion. Small merchants in particular can often feel hard done-by, seeing a proportion of their profit margin going to the credit card company on a swiped transaction, which they would have kept if it was cash (often forgetting that without accepting cards they might well not have made the sale at all). So they became the poster child for a campaign largely financed by large retailers to get government to limit the amount that can be charged as an interchange fees. They were aided in this campaign by groups that dislike the very idea of credit cards and banks at all.
One of the first countries to impose credit card interchange fees was Australia, as Ron Manners described on the panel. In 2003 the Federal Reserve Bank of Australia reduced interchange fees from 0.95 percent per transaction to 0.5 percent. Regulation after regulation — “all this nonsense” as Ron put it in his characteristically Australian way — has been heaped on top of this, with absurd results such as now being charged one fee for each leg of an airline flight even if the entire flight was booked at the same time and the end of credit card reward programs. Echoing the title of one of his books, Ron called it an Heroic Misadventure.
I described the effects of the Durbin Amendment to the 2010 Dodd-Frank Act in addition to a general overview of why current levels of regulation hurt the economy (I always begin with the ludicrous tale of Marty the Magician and his 26-page disaster plan for his rabbit, Casey). The Amendment gave the Federal Reserve the power to limit interchange fees, which they did at around 24c per transaction for “non-exempt” issuers. When the Durbin Amendment was first mooted, based on the Australian experiences, we predicted that none of the savings to merchants would be passed on to consumers and that it would bring an end to credit card rewards programs and free debit cards. Now, thanks to a study by David Evans et al. of the University of Chicago Coase-Sandor Institute, we know that that did happen, and that consumers are worse off to the tune of around $200 per household.
Next up is Europe, as Zilinias Silenas of the Lithuanian Free Market Institute and Conny Svennson of Mastercard Europe described. Zilvinias pointed out the absurdity of dictating a single price for a transaction in a huge market like Europe, which he did with the aid of a photograph of a Soviet-era spoon, stamped with its price — 30 Kopecs. This same price was charged in Vilnius, the Urals, and Kamchatka. Even the Soviets, however, realized that some products, like dairy, needed variable prices, making the EU’s proposals less flexible than the Soviet “market” economy. Conny outlined the divide in Europe between member states as to what was appropriate — and warned that some states were in favor of a zero transaction fee, which would cripple the credit card industry.
Finally, we should note how banks have adapted to the regulations. Pre-paid cards, which are exempt from the interchange fee cap, have soared in use, with banks pushing their customers towards them. This presages the demise of access to credit. In a country where Google was founded by Sergey Brin and Larry Page maxing out their credit cards, this should give us real pause for thought.