73 Pages Posted: 1 Apr 2005
Whether a customer pays with cash, check, PIN- or signature-based debit card, or credit card, the transactions costs imposed on the merchant differ widely, but credit card networks' no-surcharge rules prevent the merchant from passing those different costs along to the customer. These no-surcharge rules are anti-competitive and cause an inefficient over-consumption of credit at the expense of other payment systems. Moreover, no-surcharge rules result in substantial negative social and economic welfare effects, including inflation, decreased consumer purchasing power because of greater debt service, lower savings rates, more consumer bankruptcies, inequitable subsidization of credit consumers by non-credit consumers, and unnecessary subsidization of the entire credit card industry outside of the political process. This article is the first piece in the legal literature to examine no-surcharge rules in the age of expanding electronic payment systems and rising consumer bankruptcies and to connect no-surcharge rules to social welfare issues.
No-surcharge rules are coming under scrutiny in the US and abroad. The Federal Reserve Board has just embarked on its first-ever comprehensive review of Regulation Z, which implements the Truth-in-Lending Act and cash-credit pricing differentials. Recent anti-trust examination of credit card networks in the US and Europe may signal that the Board is willing to inspect closely many credit card practices. Australia's marked drop in demand for credit cards after banning surcharge restrictions in 2003 may also play into the Board's stated concern about the rapidly increasing growth of consumer debt in the US. Even if the Federal Reserve Board fails to act, the growth of the major credit cards networks' products at the expense of other payment systems networks may lead to private anti-trust actions directed at no-surcharge rules. The potential legal challenges would be the Superbowl of anti-trust litigation, dwarfing the record $3 billion anti-trust settlement Visa and MasterCard reached with Wal-Mart in 2003 over their restrictions on debit-card pricing. No-surcharge rules' role in payment system economics will undoubtedly gain increased attention over the next few years, as the abolition of no-surcharge rules would dramatically change Americans' payment and debt behavior.
Keywords: Credit cards, surcharges, no-surcharge rule, no-discrimination rule, cash discounts, truth-in-lending act, cross-subsidization, inflation, payment systems, debit cards, antitrust, regulation z, reg z, frequent flyer
JEL Classification: E5, G33, K21, K23, L13, L42, L43
Suggested Citation: Suggested Citation
Levitin, Adam J., The Anti-Trust Superbowl: America's Payment Systems, No-Surcharge Rules, and the Hidden Costs of Credit. Berkeley Business Law Journal, Vol. 3, No. 1, p. 265, 2005. Available at SSRN: https://ssrn.com/abstract=889460
By Adam Levitin