Why the payments system should be regulated
I’m about to head down to DC to appear on an interchange-fees panel sponsored by the libertarian types at GMU. I hope they read Mike Konczal’s blog entry (and mine, of course), but at heart I think the disagreement is simply philosophical.
In my post I wrote that “all the recent increases have been pure gouging, made possible by the Visa/Mastercard duopoly”, and one of the most interesting comments in response came from billyjoerob, who wrote:
Felix Salmon really should write the Critique of Pure Gouging, and draw a distinction between “pure gouging” and other ordinary profit-maximizing activities. Which is not illegal, not so far.
There’s a narrow answer to this, which is that when you have a duopoly it’s important to regulate gouging. But there’s a broader answer, too, which is simply that we’re talking about payments here — and it’s perfectly natural and sensible for the government (or at least the Federal Reserve) to be involved in regulating the payments process, including clearing, settlement, interchange, and everything else. In a world which going increasingly cashless, it’s important to beware the stealth transformation of what has historically been a very low-margin commodity business into a very high-margin profit center for America’s biggest banks.
Electronic payments can and should be cheaper than cash payments, for all manner of reasons. Instead, they’re much more expensive, and interchange fees show no signs of topping out. For the sake of the economy as a whole, let’s try to make the payments system as frictionless as possible. Rather than using it as a way of propping up bank profitability.