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

. No doubt, merchants will not always pass thru all the savings to consumers; the pass-thru depends on how competitive their particular industries are. But merchants are, in general, much more price competitive than card issuers, so there is likely to be much greater rent dissipation via merchants competition for consumers than via card issuer competition for consumers….

There is still the problem of fees being shifted from one type to another. But because certain types of fees (e.g. annual fees) are more salient to consumers than others (e.g., interchange fees), it isn’t possible for card issuers to do a dollar-for-dollar shift in fees. Forcing fees toward transparent, salient points enhances competition and pushes down total fee levels. Our goal should be a card market with as close as possible to perfect competition and maximum consumer choice. Unfortunately, this isn’t a market in which a pure laissez-faire approach will achieve that.

Note the first paragraph. This is what I hear from merchants all the time – they’ve been jacking the fees recently, and there’s been no decline in market share whatsoever. This is why, as Ryan Grim and Laura Bassett report, merchants have been collecting signatures, trying to educate, and getting political – they feel powerless to negotiate these fees in any productive manner.

Estimating Cross-Subsidization

Some additional stuff: Here’s a neat study by Efraim Berkovich of University of Pennsylvania, sponsored by the Hispanic Institute, Trickle-Up Wealth Transfer: Cross-subsidization of consumers in the payment card market. Look at the income distribution and millions of dollars in transfers estimated in this graph:

They “gathered telephone survey data on payment method usage from a cross-section of consumers in the U.S. stratified by income. We specifically asked about spending on gasoline and groceries. Other questions asked about card rewards and annual fees”, and then estimate out the transfers. I haven’t gone through this paper for the full methods yet, but even if this is a ballpark estimate (and I believe it is), it’s shocking. What I find the most interesting is that it goes from positive to negative much higher than the median person. The 60th income decile is probably net redistributing upwards from their cards. That’s much higher in the curve than I would have expected, which is shocking even to me.