GMU rejects credit cards because of high interchange; more interchange; net redistribution upwards.

Heh. Great catch by credit slips. George Mason University, whose Mercatus Center hosted the recent panel about interchange I was on as well as the research of Todd Zywicki about interchange, research that found that “Merchants’ efforts to cabin these [interchange] fees would harm not only consumers but also the merchants themselves”, is no longer accepting Visa cards for tuition because the interchange is too high.

To repeat, George Mason University is no longer accepting Visa cards for tuition because the interchange is too high.

If ever there called for radical campus activism from the right at GMU, this is it. I like the idea of libertarians at GMU, egged on by their professors, chaining themselves to administrative offices, refusing to leave the premises until the administration acknowledges that in a perfect world with a perfect market in a closed loop with networks properties economic theory tells us it can’t matter to anyone what the interchange rate is, so the administration must accept Visa’s demands no matter what it is cause the rate doesn’t even matter. Students would disrupt administration meetings by standing up and reading Ronald Coase’s The Problem of Social Cost. Someone would give a passionate speech, Mario Savio style, that sometimes you have to pour 2%+ and rising of the dollar amount of all purchases upon the gears and upon the wheels, upon the levers, upon all the apparatus of our payment system, and you’ve got to make sure merchants have no power to price discriminate.

Seriously though, GMU is lucky to be in a privileged position to opt-out, thus giving them some negotiating power over their fees. For most businesses, having to take credit cards as the 21st century payment is just how the economy works.

A little bit more.

For those who want more arguments on interchange, this back and forth in comments between Todd and Adam Levitin is very good. Adam:

This spring, Visa’s Interlink debit network raised fees by 18-40% (depending on merchant category) and made it more difficult to get into the lower fee categories. No loss of market share. And no increase in rewards programs as a result. That sure looks like economic rents earned by the issuers to me.

There’s also a recent example from the credit card market. While credit card interchange has remained stable (on a weighted average basis) for the last couple of years, the total cost for merchants has risen because there’s another pig at the trough since MasterCard and Visa’s IPOs. The networks are now being run on a for-profit, rather than mutual basis, and the shareholders want to be fed. So network assessments have increased on MasterCard and Visa, but not on Discover and Amex. Again, a small, but significant increase in price without any loss in market share for MasterCard and Visa. Raising fees to feed another mouth via dividends to shareholders is pure extraction of economic rents by the networks….

But we know that’s not the real world. Issuers do not pass thru anywhere close to 100% interchange above processing costs because the card issuance market is not price competitive. Card issuers compete on things like image, rewards, and salient price points, not total price. While networks compete for issuers, that simply does not translate into consumer benefit. Because of imperfect competition in the issuing market, issuers are able to retain most of the interchange fees they levy. Those are economic rents.

Your concern is that if interchange fees are regulated, merchants will effectively become the rent receivers, and these rents won’t be dissipated via lower prices to consumers