Tag: merchant restraints

  • Interchange Week on the Slips

    Posted by

    Adam Levitin

    Let’s call this interchange week. With efforts to bring the Credit Card Fair Fee Act to vote in Congress picking up steam, I’m going to do a few postings on different aspects of the interchange debate this week. Coinciding with this, the printer proof of my recent article on the economics and origins of interchange is available on SSRN (spoiler: interchange and merchant restraints are less about network effects than about evading TILA, usury laws, and branch banking restrictions).

    So as a primer for the rest of my posts, who’s up for some good ol’ fashion credit card network economics?

    (more…)

  • Credit Card Fair Fee Act

    Posted by

    Adam Levitin

    This weekend, the lead editorial in the Wall Street Journal was about the Credit Card Fair Fee Act, legislation sponsored by John Conyers (D-MI) and Chris Cannon (R-UT) that would create a special administrative law judge panel to set credit card network interchange fees.

    The Journal came out against the legislation, as a simple fee setting regime. Whether an ALJ panel is the best way to fix the interchange problem is certainly a fair issue for debate…once we all acknowledge that there is a serious problem and that a legislative fix might be in order.

    I was pleased to see that the Journal recognized that there might be some problems in the card market, even if I am less sanguine that a fix will emerge from the market itself. Still, I want to address a few points in the WSJ editorial, though, that should not go unchallenged.

    (more…)

  • European Commission Rules MasterCard’s Interchange Fees Are Illegal

    Posted by

    Adam Levitin

    In December, the European Commission antitrust authority, the Directorate General Competition, ruled that MasterCard’s interchange fees are illegal. (I realize it is now mid-January, but I wasn’t blogging when it the ruling came out.)  MasterCard is, of course, appealing. 

    Although ruling this made page 4 of the Wall Street Journal, it has gotten very little attention otherwise in the business or general press.  ( The ruling has huge ramifications for consumers and merchants.  The underlying issue is technical, however, but well worth understanding.   

    (more…)

  • Who’s Paying for Your Rewards Points?

    Posted by

    Adam Levitin

    The relationship between consumers and credit cards gets a lot of attention. But merchants also have relationships with credit cards, and the dynamics of this relationship have significant effects on consumers’ use of credit cards as well as on the competitive landscape in the credit card industry. A lot of my academic work has related to this (I apologize for the self-promoting links), and this post is meant to provide a short summary of some of the issues that arise in this relationship. There are a lot of twists that I cannot convey in this blog posting, but I am happy to carry on a conversation in the comments and refer readers to my articles on the topic for more detail (the most recent papers are at the bottom of the linked webpage).

    Merchants pay banks a fee on every credit card transaction. The fee is referred to varying as the “merchant discount fee” or the “interchange fee.” Because of these fees, credit card transactions are much more expensive for merchants than transactions on most other consumer payment systems: cash, checks, ACH, PIN debit (but not signature debit). There is also significant cost variation among credit cards. Some cards, such as rewards and corporate cards can cost merchants twice as much as others. These fees (tens of billions of dollars) are vital to credit card networks’ profitability and have led merchants to attempt all sorts of strategies to minimize their payment costs.

    The largest component of the fee merchants pay goes to finance credit card rewards programs, which in turn generate more credit card transactions. Although merchants finance the rewards programs, they derive little or no benefit from them. Rather than generating additional sales, rewards programs merely induce consumers to shift transactions from less expensive payment systems to more expensive rewards credit cards. So why, then, do all consumers pay the same price for purchases, regardless of the means of payment?

    (more…)