Tag: debit

  • 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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  • Is Spending the Way2Save?

    Posted by

    Adam Levitin

    Financial institutions have begun to offer programs that appeal to consumers’ desire for assistance with disciplining their saving and spending decisions. These programs draw on the insight of behavioral economics and cognitive psychology that default rules have a powerful effect in shaping consumer behavior. For example, Richard Thaler and Shlomo Benartzi have proposed requiring people to opt-out, rather than opt-in to employer-sponsored savings plans in order to overcome bounded rationality and encourage higher savings rates.

    The first financial institution I know of that offered a savings assistance program was Bank of America’s Keep the Change program, which has been well-critiqued around the web. Now Wachovia has a new program called Way2Save. On the surface the program looks great. But when probed, it isn’t clear whether consumers end up with meaningful savings—increased purchasing power. With all of these programs the question that we need to ask is how much does it cost you to save?

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  • The Social Security Prepaid Debit Card

    Posted by

    Adam Levitin

    The Wall Street Journal reports today that Social Security is planning on disbursing funds using prepaid debit cards instead of checks. 

    This is significant for two reasons.  First, it redistributes the costs of Social Security payments among the federal government, social security recipients, merchants, and banks.  Second, it represents the federal government’s most major outsourcing of payments and creates a potential benefits provision monopoly.  The Because of this monopoly situation, Treasury and Social Security Administration need to ensure the reasonableness and fairness of any consumer fees associated with Social Security debit cards.

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