The Economics of Payment Card Interchange Fees and the Limits of Regulation

ICLE Financial Regulatory Program White Paper Series, June 2010

George Mason Law & Economics Research Paper No. 10-26

64 Pages Posted: 14 Jun 2010  

Todd J. Zywicki

George Mason University - Antonin Scalia Law School, Faculty; PERC - Property and Environment Research Center

Date Written: June 11, 2010

Abstract

Fresh off of the most substantial national liquidity crisis of the last generation and the enactment of sweeping credit card regulation in the form of the Credit CARD Act, Congress continues to deliberate, with a continuing drumbeat of support from lobbyists, a set of new regulations for credit card companies. These proposals, offered in the name of consumer protection, seek to constrain the setting of “interchange fees” - transaction charges integral to payment card systems - through a range of proposed political interventions. This article identifies both the theoretical and actual failings of such regulation. Payment cards are a secure, inexpensive, welfare-increasing payment mechanism largely unlike any other in history. Rather than increasing consumer welfare in any meaningful sense, interchange fee legislation represents an attempt by some merchants to shift costs away from their businesses and onto card issuing banks and cardholders. In particular, bank-issued credit cards offer a dramatic improvement in the efficiency and availability of consumer credit by shifting credit risk from merchants onto banks in exchange for the cost of the interchange fee - currently averaging less than 2% of purchase value. Merchants’ efforts to cabin these fees would harm not only consumers but also the merchants themselves as commerce would depend more heavily on less-efficient paper-based payment systems. The consequence of interchange fee legislation, as Australia’s experiment with such regulation demonstrates, would be reduced access to credit, higher interest rates for consumers, and the return of the much-loathed annual fee for credit cards. Interchange fee regulation threatens to constrain credit for consumers and small businesses as the American economy begins to convalesce from a serious “credit crunch,” and should be accordingly rejected.

Keywords: ACH, ATM, American Express, Cash, Checks, Diners Club, Electronic Payments, Federal Reserve Board, GAO, Government Accountability Office, Mastercard, Paperless, Paypal, Revolutioncard, Thomas Durkin, Visa

JEL Classification: D11, D18, D23, E51, G33, L14

Suggested Citation

Zywicki, Todd J., The Economics of Payment Card Interchange Fees and the Limits of Regulation (June 11, 2010). ICLE Financial Regulatory Program White Paper Series, June 2010; George Mason Law & Economics Research Paper No. 10-26. Available at SSRN: https://ssrn.com/abstract=1624002

Todd J. Zywicki (Contact Author)

George Mason University - Antonin Scalia Law School, Faculty ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States
703-993-8091 (Phone)
703-993-8088 (Fax)

PERC - Property and Environment Research Center

2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

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