Abstract

http://ssrn.com/abstract=2346311
 


 



Credit Where It's Due: How Payment Cards Benefit Canadian Merchants and Consumers, and How Regulation Can Harm Them


Ian Richard Lee


Carleton University

Geoffrey A. Manne


International Center for Law & Economics (ICLE)

Julian Morris


Reason Foundation

Todd J. Zywicki


George Mason University School of Law; PERC - Property and Environment Research Center

October 28, 2013

Pp. 1-46, Macdonald-Laurier Institute, October 2013
George Mason Law & Economics Research Paper No. 13-58

Abstract:     
In recent years, some Canadian politicians and powerful interest groups have issued increasingly vocal calls for dramatic regulatory interventions into the country’s payment cards system. In particular, they have called for a "hard cap" price-controls on interchange fees, a ban on contractual terms that prohibit card-accepting merchants from imposing surcharges on consumers that use payment cards, and a ban on so-called "honour all cards" rules that require a merchant to accept all payment cards issued under any payment network’s logo.

Advocates claim that these interventions will benefit businesses (especially small and medium-sized merchants) and consumers. An examination of economic theory and available empirical evidence, however, demonstrates that these claims of the benefits of intervention are unsupported. In particular, review of the effects of payment card regulation in the U.S., Australia, and elsewhere suggests that price controls and other interventions result in higher banking and credit card fees for consumers, while retailers are unlikely to pass on much of the savings to consumers. There is every reason to believe the same outcome will continue to occur in Canada if current efforts to regulate are enacted and unless existing regulations are relaxed.

Instead of imposing regulations on the operators of payment card networks, which would undermine competition and harm consumers, Canada should seek to promote increased competition. The most effective way it can do that is by removing currently-existing legal barriers to competition that support a monopolistic structure in the debit card market and prevent Interac and other card networks from competing fairly with each other. Equally important is avoiding the imposition of costly new restrictions that would interfere with freely-bargained contractual rules between card networks and merchants that benefit consumers, such as no-surcharge rules (which protect consumers from surprise price increases at the register) or honour-all-cards rules (which guarantees ubiquitous acceptance of consumers’ cards).

Number of Pages in PDF File: 53

Keywords: Boston Fed Study, cap, credit cards, cross-subsidies, debit, Durbin Amendment, efficiency, electronic payments, innovation, interchange fee regulations, NDP, pass-through fees, price controls, surcharge, two-sided markets, United States

JEL Classification: D12, D18, D41, D52, D61, K20, M20, O57

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Date posted: October 29, 2013  

Suggested Citation

Lee, Ian Richard and Manne, Geoffrey A. and Morris, Julian and Zywicki, Todd J., Credit Where It's Due: How Payment Cards Benefit Canadian Merchants and Consumers, and How Regulation Can Harm Them (October 28, 2013). Pp. 1-46, Macdonald-Laurier Institute, October 2013; George Mason Law & Economics Research Paper No. 13-58. Available at SSRN: http://ssrn.com/abstract=2346311

Contact Information

Ian Richard Lee
Carleton University ( email )
1125 colonel By Drive
Ottawa, Ontario K1S 5B6
Canada
Geoffrey A. Manne
International Center for Law & Economics (ICLE) ( email )
2325 East Burnside St.
Suite 301
Portland, OR 97214
United States
503-770-0650 (Phone)
HOME PAGE: http://www.laweconcenter.org
Julian Morris
Reason Foundation ( email )
United States
Todd J. Zywicki (Contact Author)
George Mason University School of Law ( email )
3301 Fairfax Drive
Arlington, VA 22201
United States
703-993-8091 (Phone)
703-993-8088 (Fax)

George Mason Law School Logo

PERC - Property and Environment Research Center
2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

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