Tag: Australia

  • 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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  • Zywicki on Interchange

    Posted by

    Adam Levitin

    Todd Zywicki has a new paper out on interchange regulation, just in time to support the banks' push against the Durbin interchange amendment in conference committee. The paper doesn't present any new arguments or evidence.  Instead, it presents a highly polemical form of antiregulatory claims. 

    There's an awful lot to criticize about this paper, starting with its complete unwillingness to engage with pro-regulatory arguments and evidence on anything beyond a strawman basis.  The omission of the findings of the Reserve Bank of Australia (and reliance on a MasterCard funded study instead) on the impact of Australian regulation is remarkable.  

    But don't take my word for it.  Zywicki gets spanked around pretty soundly by the Australian economist Joshua Gans, who objects to the way his work is used by Zywicki in a "very selective and misconstrued way" in a paper whose "broad conclusions" are "flawed." 

    Let me add my own broad objection (I'll probably blog on more of the details later).  Zywicki's general assumption about bank regulation is that if fee type A is regulated, then fee types B and C will increase to offset the regulation.  That might be the result; indeed, it is a variation on the whak-a-mole bank fee thesis (also here), that if fee A is banned, new fees B and C will sprout up. 

    But there is another possible regulatory outcome that Zywicki never considers:  banks might simply have to endure lower profit margins.  If the consumer side of credit card pricing markets is competitive as Zywicki believes (I've got my doubts, which is the point of the whak-a-mole thesis), then the result should be smaller profit margins, instead of shifted fees.  Zywicki seems to take it as a given that banks must maintain profitability levels.  But they don't.  That's the nature of capitalism:  bank have a right to make a profit, but only through fair and legal competition. If a bank can't operate profitably under those conditions, should it really be in business? 

  • The Australian Interchange Experience

    Posted by

    Adam Levitin

    The New York Times ran a story on the impact of interchange regulation in Australia.  Calling it interchange regulation is somewhat of a misnomer.  The Reserve Bank of Australia in fact acted to bust up anticompetitive private regulation of interchange.  Payments are an area with intense regulation, but that regulation is often private self-regulation.  Thus, what occurred is better thought of as interchange deregulation. 

    Guess what?  Interchange regulation is working exactly as one would have predicted.  Consumers who want rewards have to pay for them directly now.  They can't free-ride off of other consumers (using cash, debit, or non-rewards credit cards) to finance their frequent flier miles, etc.  Not surprisingly, annual fees have gone up for rewards cards.  This has also pushed consumers toward greater debit card usage, which is often a healthy thing.  (To be fair, there is a similar move to debit in the US without interchange deregulation, so the causation in Australia is questionable.)

    A predictable problem has arisen in Australia, however.  Some merchants are now imposing credit card surcharges that are greater than the cost of accepting credit card transactions.  This isn't good for consumers.  But it isn't a problem with interchange regulation.  This is just a symptom of less than perfectly competitive markets in other areas of the economy.  Excessive surcharging is most likely to appear in the least competitive areas of the economy. 

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