"The Not-So-Scammy Interchange Fee Scam"
When the great Credit Card Interchange Fee Debate began, I said I was generally skeptical of the idea of purely economic regulation (as opposed to regulation aimed at public safety or environmental hazards). Kevin Drum followed up yesterday with a post on “The Great Interchange Fee Scam” which cites a Boston Fed paper (PDF) that provides the following distributive analysis:
On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $23 and the highest-income household ($150,000 or more annually) receives $756 every year.
Once you keep in mind the fact that the median household income in 2008 was slightly above $52,000 it’s not at all obvious to me that this is any kind of scam. Instead, it appears to be a classic positive sum business interaction. Credit card companies use interchange fees to cut into retailers’ monopoly rents and then rebate a share of the fee to consumers via reward programs, and on net consumers benefit and the median household appears to benefit.
This is precisely the sort of dynamic that makes me suspicious of economic regulation. Retailers seem to end up losing here in a very clear-cut way. And I bet if you ask the average credit card user “do you benefit from high credit card interchange fees” he’s going to think that he doesn’t, even though according to the Boston Fed report he clearly does (the adverse impact on the poor stems from their propensity for paying in cash). Thus retailers, under cover of a populist campaign against evil banks, can persuade politicians to enact rules that help them preserve their monopoly rents. Unless, that is, we maintain a strong presumption against this sort of regulatory second-guessing of whether business model innovation is welfare-enhancing.
Now it’s true that in this particular case my conscience is pricked by the fact that poor consumers end up losing out. At the same time, do we really think it’s feasible to conduct distributive analysis of every new business model and only accept the ones that are beneficial to poor consumers? Wouldn’t it be easier and more workable to have higher taxes and more and better public services? What’s more, doesn’t it make more sense to try to focus on issues that unite the interests of the poor and the middle class against the rich rather than ones that seem to divide us so evenly and could plausibly be even more broadly beneficial in the future as credit card usage spreads?
I’m not going to weep for days if we wind up with a regulatory crackdown on this front, but it strikes me as primarily the sort of business versus business dispute that we should stay out of.