Here Comes the Interchange Counter-Offensive

One thing I was prepping for when reading the legal research on interchange recently was having to answer for the disaster that was the Australia experience with interchange. Everyone knows that it’s been a disaster, right? That’s a meme that has been repeated so much I assumed that, even if exaggerated, there would be a there there.

What surprised me was not that it was exaggerated, but that it doesn’t seem to be there at all. To get a sense of how the normal language on Australia goes, here’s Todd Zywicki with his paper on interchange:

A recent analysis of the evidence by economist Joshua Gans concluded that, in fact, there was no discernible reduction in the use of credit cards in Australia after the change.139 If that is true, and if there has been no discernible decrease in retail prices, the net result of Australia’s intervention will have been to simply redistribute wealth from consumers to merchants with no apparent offsetting social benefits.

And it’s already having pushback from the sources he quotes. Joshua Gans, whose analysis Zywicki quotes in that paragraph above, call the paper “extremist” and notes “the broad conclusions of the paper are flawed.” Here’s his response to the quote above:

Actually, that is not what was found. It was found that the capping of the interchange fee likely did have an impact on retail prices and that the net effect was no redistribution of wealth from consumers to merchants. Zywicki argues that, in Australia, the reforms harmed access to credit. But that is clearly not the case. Credit card usage remains undiminished as a result of the reforms. Also credit card debt was undiminished so there is no evidence of a difference in the composition of card users. Instead, it is better to say that the intervention was broadly ineffective. But that also means that big concerns of its negative impact in the US are unwarranted when looking at the Australian example. Basically, the broad conclusions of the paper are flawed.

Ouch.

Felix Salmon takes on the rest of the paper here, and you should read it. A few extra points:

- Maybe the paper brings it up and I missed it, but according to Kansas City Fed: “the level at which interchange fees are set in the United States is among the highest in the world.” (I believe from on background sources that they are the highest in the world, but let’s go with the KC Fed here.)

Why is that? Why wouldn’t it be one of the lowest? If given a satisfactory answer to this, I could switch my mind. But I have yet to hear one.

- There’s a lot of talk about cash to credit subsidy, but the real issue is debit-to-credit subsidy. I prefer to use my pin debit card because I like having two levels of identification to prevent fraud, and I imagine small businesses prefer that too. Why do I have to subsidize someone else’s airline tickets? Why does my grocer’s margins have to be eaten into in order to fund rich people’s reward card and the airline industry?

If it was just cash-to-credit subsidy, businesses could just not accept plastic. But the rules currently don’t allow for discounts for debit.

- Felix brings up that interchange isn’t about credit risk management