Why the payments system should be regulated

By Felix Salmon
June 8, 2010
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.

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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.


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Not to be rude, but why bother? From what I can tell most of the people at GMU are ideological hacks, who refuse to accept any argument based on the premise that government should intervene and regulate businesses, because they refuse to acknowledge information/power asymmetries, etc.. (The Volokh conspiracy website contains a whole host of them, with the worst example probably being Zywicki’s ‘critique’ of Warren’s “The Two-income trap”, in which he tries to muck up the discussion a bit by equating nominal increases in taxation with relative increases, as well as a few other things an undergraduate can see through. People who are that intellectually dishonest – or, alternatively, that convinced of the stupidity of their readers – really don’t belong in academia. Quite a few of the comments there center on the “private responsibility” red herring. They apparently think it’s fine to allow lenders to defraud their victims, so long as Big Government doesn’t try to level the playing field, because that would destroy “The Market”. http://volokh.com/posts/chain_1187542660 .shtml All very predictable, and very boring, but also just very sad to see that this is what they see as ‘intellectual debate’.)

Posted by Foppe | Report as abusive

Let the banks charge what they want and let the merchants pass on the cost to the consumer.

Posted by Mr.Do | Report as abusive

I thought the NYT’s lengthier article laid this out reasonably well. It’s a multi-sided market, and it turns out (based on banks’ and CC companies’ behavior) that the competitive spoke isn’t for the consumers or the merchants, but rather for the banks (and competing for banks means screwing over merchants directly, and consumers indirectly).

I think there’s a regulatory ‘middle ground’ here, and that’s to force the CC companies to make interchange etc. fees transparent at time of purchase, and allow merchants to pass this on (presumably within the next few years, since this would involve tech deployment). If the merchants feel they’re being screwed, they’ll pass it on to customers. If consumers see the fees, maybe they’ll pick a more friendly bank/CC.

And if that doesn’t work, use a heavier cudgel. But right now, transparency to consumers and ability for merchants to price-discriminate seems like a reasonable thing to ask for.

Posted by absinthe | Report as abusive

So I think the biggest part of Zywicki’s argument in your linked post (aside from the conflation of credit and debit and the nigh-total neglect of interest costs) is that he doesn’t think that there’s evidence of monopoly rents being extracted in the retail payments business. You might start by looking at what fees for electronic payments are internationally (hint: lower), but fundamentally this question can’t be understood without numbers. I’d start with 51.22%, Visa’s operating margin, and suggest that a business like that with only a few competitors is likely to be extracting rents.

File this one under “questions answerable with one bloomberg command,” in this case “V equity des3″…

Posted by dbfclark | Report as abusive