Tag: annual fees

  • Interchange Theory: Simultaneous Rent-Extraction from Both Merchants and Consumers

    Posted by

    Adam Levitin

    Todd Zywicki and I have been having a back and forth on interchange in several forums.  Todd and Joshua Wright had an op-ed in the Washington Times, I responded with a letter to the editor, and then Todd came back with a blog post. I posted a detailed response to Todd in the comments to his post, but I will repost the core of the response here.  

    In his blog post, Todd says that he can't understand my argument that in the credit card world there are economic rents (supracompetitive prices) being extracted from both merchants and consumers.  Todd thinks the only possible economic rents story is one of merchants being charged too much and consumers too little.  (Todd does not endorse this story, but he at least gives it theoretical credence.)  Therefore, Todd believes that any reduction in interchange income must be offset by an increase in consumer charges.

    What follows is a brief outline of my argument that the current credit (and debit) card system simultaneously extracts economic rents from both merchants and consumers.  The corollary to my argument is that interchange regulation actually produces reductions in the economic rents paid by both merchants and consumers; it does not result in costs being shifted form merchant to consumer, but instead results in reduce profits for card issuers and card networks.  To this end, I present a rough sketch of the net impact of interchange reform in Australia; as surprising as it is, I do not believe this has been done before.  

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  • Pro-Consumer Innovations in Payments

    Posted by

    Adam Levitin

    Todd Zywicki wrote in a Wall Street Journal op-ed yesterday that "The most important
    pro-consumer innovation in payment systems of the past two decades has been the
    general disappearance of annual fees on most credit cards." 

    Todd is right that consumers are happy to see annual fees go away, but the disappearance of annual fees wasn't a freebie for consumers.  It came about as part of a shift in the credit card business model whereby upfront fees were replaced with backend fees that have lesser salience to consumers when the consumers decide which cards to carry and use.  This was a move that was made to increase revenue for card issuers (or put another way, to siphon off more consumer surplus); it was not a charitable act.  The disappearance of annual fees is an important innovation, but I think it is a stretch to call it a pro-consumer innovation, when it is viewed contextually.  

    The disappearance of annual fees was a step in the democratization of credit (or put another way, the decline in underwriting standards).  Whether this was a good thing is unclear.  It certainly increased consumer's borrowing ability and choices, and might have led to a substitution from secured installment credit to unsecured revolving credit.  But greater ability to borrow and more borrowing choices are not necessarily good.  They are only good to the extent that a consumer is capable of repaying the increased credit line and making informed choices among credit options.  Both of those are questionable for many consumers.  

    In Todd's defense, though, I am hard pressed to think of another widespread innovation that would qualify unabashedly as pro-consumer, so maybe the disappearance of annual fees wins by default.  I would have placed the card associations' waiver of all consumer liability for unauthorized transactions (going beyond TILA) as the clear winner, but I don't know how far back this policy goes.  (Please pipe in if you do.)  

    The difficulty in naming pro-consumer innovations is a sorry indictment of the payments industry, and one that says something about the nature of innovation and competition in payments.  Maybe others have thoughts about pro-consumer innovations.  Comments are open.