More economic nonsense has appeared on the topic of interchange fees related to credit and debit cards. This time, it’s courtesy of Albert Foer, president of the American Antitrust Institute, writing on the opinion page of the April 21 New York Times (“Our $48 Billion Credit Card Bill”).
Foer begins: “These days, it’s hard to find anyone who doesn’t use credit and debit cards regularly — they’re convenient and compact and often come with small cash-back incentives. But what almost no one realizes is that those benefits are far outweighed by an implicit transaction fee, set by credit card companies and their issuing banks…”
How does Foer know that interchange fees outweigh the benefits of credit and debit cards? He offers no evidence. And considering the widespread use of such cards by both consumers and businesses, his assertion makes no sense. After all, if the costs truly did outweigh the benefits, then credit and debit cards simply would whither away and die in the marketplace. But since that obviously is not the case, Foer’s opening premise is dead wrong.
He goes on to talk about the share that MasterCard and Visa have of “the general purpose credit card market” in order to give the impression of some kind of noncompetitive, monopoly power at work. But that market definition seems a bit convenient, doesn’t it? After all, credit and debit cards – which by the way have thousands of banks offering such cards and competing to attract consumers – do not simply compete against each other. Consider the following points from “The 2008 Survey of Consumer Payment Choice” by Kevin Foster, Erik Meijer, Scott Schuh, and Michael A. Zabek, January 2010 version, Federal Reserve Bank of Boston, regarding U.S. consumers’ payment choices:
• “U.S. consumers have more payment instruments to choose from than ever before (nine). In 2008, the average consumer had 5.1 payment instruments and used 4.2 payment instruments in a typical month.”
• “Consumers have widely adopted some, but not all, payment instruments. Essentially all consumers have adopted cash. Checks have been adopted by 91.3 percent of consumers. A payment card has been adopted by 93.4 percent of all consumers: 80.2 percent have a debit card and 78.3 percent have a credit card, but only 17.2 percent have a prepaid card. Finally, 81.2 percent of consumers have adopted an electronic payment method. More than half of consumers (52.5 percent) have adopted online banking bill payment, and 73.4 percent of consumers have debited their bank account via an external website.”
Consider the following sample of payment options: Visa, MasterCard, Americans Express, Discover, PayPal, Google Checkout, STAR, NYCE, Accel, China UnionPay, JCB, NETS, the Euro Alliance of Payment Schemes, Revolution Money, Tempo, Amazon, Secure Vault, Tempo, Moneta, Click&Buy, eBillme, Noca, Danal, thousands of card issuers – and, yes, cash and checks.
Of course, Foer argues for the government to impose price controls. He proposes: “Congress should authorize the Federal Reserve to limit credit card interchange fees to their actual cost, fairly determined, plus a reasonable profit.”
Foer either forgets or fails to understand Economics 101, and the role that prices and profits play in the marketplace. Quite simply, prices and profits serve as signals. Credit card industry profits, for example, encourage the expansion of cardholders and merchants in the network, as well as investment and innovation, which benefit both consumers and businesses. Firms have every incentive to get the price right for their services so as to maximize profits. In the case of interchange fees, set them too high and businesses will not accept the cards; set them too low and fewer cards are issued. Perhaps most critically, price and profit signals spur competition.
The only things accomplished by price controls will be eroded card services, diminished investment and innovation, shifts in costs, less efficiency, and reduced access to credit.
Small businesses certainly want to reduce any and all costs possible. But having the government step in to impose price controls – i.e., set interchange fees – certainly is not the answer. Indeed, it would be another costly and dangerous expansion of governmental power.
Nonetheless, Foer calculates all kinds of savings resulting from price controls, and concludes: “Not only would such savings make our retail payment system more fair, but it would represent a significant economic stimulus at a time when consumers are just starting to spend again. And best of all, it wouldn’t cost Washington a thing.” Of course, to make such an assertion, one must ignore common sense economics, as well as lost investment, innovation and competition. Perhaps price controls would not cost politicians and regulators in Washington a thing, but they certainly would mean increased costs – in a variety of forms – for consumers and small businesses.
Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council
No comments:
Post a Comment