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

Pp. 1-46, Macdonald-Laurier Institute, October 2013

George Mason Law & Economics Research Paper No. 13-58

53 Pages Posted: 29 Oct 2013  

Ian Richard Lee

Carleton University

Geoffrey A. Manne

International Center for Law & Economics (ICLE)

Julian Morris

Reason Foundation

Todd J. Zywicki

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

Date Written: October 28, 2013

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).

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

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: https://ssrn.com/abstract=2346311

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 )

3333 NE Sandy Blvd
Suite 207
Portland, OR Oregon 97232
United States
503-770-0076 (Phone)

HOME PAGE: http://www.laweconcenter.org

Julian Morris

Reason Foundation ( email )

United States

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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