The Effects of Price Controls on Payment-Card Interchange Fees: A Review and Update
- Author(s):
- Julian Morris, Todd J. Zywicki, Geoffrey A. Manne
- Posted:
- 3-2022
- Law & Economics #:
- 22-07
- Availability:
- Full text (most recent) on SSRN
ABSTRACT:
Over the past 20 years the consumer payments system has been transformed as electronic payments such as debit and credit cards have rapidly displaced legacy payment systems, especially checks. At the same time, this growth in the use of electronic payments has triggered increasing government regulation of consumer payments, often at the behest of merchants and other interest groups that appreciate the convenience and value of electronic payments but seek to avoid the costs of these systems.
This review updates our previous analyses, incorporating insights from recent research to describe and explain these trends in the context of various efforts by governments around the world to regulate payment card networks. We begin with a brief review of the theory of two sided markets, emphasizing the important role played by the interchange fee as a means of balancing the two sides of the payment network market: merchants and cardholders. This leads to the main focus of the review: empirical evidence of the effects of price controls on interchange fees. Affirming our previous work, we find that price caps on interchange fees have had many pernicious effects and that, in contrast to the claims of those who support them, they have done far more harm than good. Our main findings are:
1. Interchange-fee caps have harmed the very people they were supposed to help. They have resulted in lower revenue for issuing banks, which have responded by increasing fees for consumers, either on bank accounts, on credit cards, or both. These fee increases have in general been highly regressive, hurting those with lower incomes the most.
2. In some cases, such as with the Durbin amendment in the United States, the higher fees appear to have resulted in many people becoming unbanked.
3. In nearly all cases, issuers have reduced the rewards on payment cards. But those with higher incomes and/or better credit records have often been able to switch to alternative payment cards that are not subject to the caps. So, the reductions in rewards have mainly harmed the poor and those with poor credit records.
4. The rate at which merchants have passed through reductions in costs associated with lower interchange fees (in the form of lower-priced goods) has been less than the rate at which banks have passed through losses in fee revenue-in the form of higher-priced accounts, cards and services, and reductions in rewards. As such, consumers have lost out on net.
5. Interchange-fee caps have had somewhat predictable effects on modes of payment and hence on investments in those modes of payment. Thus, the Durbin amendment, which exclusively affected debit, led to a shift in payments toward credit and impeded investment in debit-related payment technologies (until fintech companies realized they could partner with exempt financial institutions). By contrast, the caps in Australia and the EU were effectively tighter for credit than for debit (since the difference between the interchange-fee rates before the caps and after the caps was greater for credit than debit), which led to shifts away from credit and toward debit. However, the caps were so low that investment in domestic debit systems seems to have been impaired, especially in Australia.