Saturday, July 22, 2006

United States Senate Committee Hearing on antitrust concerns for credit-card rates

See this page with information/links. Essentially this is the usual exhange of views where consumers and retailers protest and banks and card schemes try to explain why interchange fees are necessary for payment systems.

And once again the regulatory reforms of the Reserve Bank of Australia are taken as an example of improper intervention. Josh Floum, General Counsel and Executive President of Visa U.S.A. stated:
Three years ago, the Reserve Bank of Australia imposed artificial price caps on interchange fees set by Visa, MasterCard and another bank-owned payment system. The Reserve Bank cut rates by 43 percent, from 0.95 percent to 0.55 percent. The Reserve Bank did not regulate the price that American Express charges merchants or modify the internal transfer that American Express makes from its internal acquiring side to its issuing side (i.e., the American Express “interchange” fee). Nor did it benchmark the total price that merchants should pay to accept four-party payment systems to what American Express charges its merchants.

The regulatory intervention has had precisely the expected effect. Cardholders in Australia are paying more for payment cards than they did before through higher annual fees and finance charges. They are also getting less in terms of reward programs and other rebates. Merchants, meanwhile, have seen their cost of payment card acceptance drop some. But there is no evidence that they have passed this decrease in cost on to consumers in the form of lower retail prices. In fact, the Reserve Bank, which had promised that retail prices would decline as a result of its intervention, has given up trying to prove the existence of the promised decline.


While I feel that the Australian example is quoted too easily and a lot of sensible work is dismissed too quickly, the Australian case does highlight an interesting thing. Merchants do indeed cheaply attack banks on interchange fees and monopolistic behaviour, suggesting that retailers are the good guys and banks the bad guys. But all across the board however, they do not share the cost-benefits of lower card fees to consumers. Which could be qualified as just as monopolistic (and if so: forbidden)interorganisational price strategy as the one they claim to attack.

This is the same in the Netherlands. Since last year, Dutch retailers got a one cent discount for POS-transactions. But they continue to charge customers that pay small amounts with their debit-card a fee of 10 cents per transaction. If retailers were honestly interested in serving their customers, they would pass it on and reduce the extra payment charge for small payments to 9 cents.

So the real lesson here is that regulators, central banks and ministries of finance may want to be careful when leaning towards favoured underdog policy positions of retailers or consumers. Whilst these positions may coincide more with their own policy position (banks need to be disciplined to avoid cartel-behaviour) it does create a new form of regulatory capture. Essentially the regulators may thus back these specific partial interests in society rather than taking a societal point of view.