Timothy Lee on the Symmetry of Interchange

Guestblogging for Megan McArdle, Timothy B. Lee writes about the The Symmetry of the Interchange Debate. It’s worth reading, but here’s two parts. First Tim has a sweet deal with his card:

In particular, hardly anyone in the interchange debate has paid much attention to the generosity of cardholder benefits programs. For example, I currently have a credit card from Chase that offers me 1 percent cash back on every purchase I make, with no gimmicks or strings attached. Perhaps even more impressive is the seemingly perpetual availability of 12-month, interest-free loans. [Clarifying edit: these are separate offers from other banks, not another feature of the Chase card. And they're on purchases, not balance transfers.] I was skeptical of such offers when I first started getting them, but I’ve now used them a few times and there doesn’t seem to be a catch. I’m not sure exactly how to value a 1-year, 0 percent loan, but it’s easily worth more than 1 percent of the amount borrowed.

Second, here’s his argument on regulation and symmetry:

Most of the commentary on interchange fees have focused on the rate paid by merchants, but this is the wrong number to focus on. Rather, we should care about the net of merchant fees minus cardholder benefits. If credit card fees rise but benefits rise by an equal amount, the result is a wash as far as the customer is concerned. I’m not aware of any precise data on cardholder benefits, but judging from the fact that companies used to charge an annual fee to issue credit cards and they now frequently offer generous cash back, I think it’s safe to say that benefits have gotten more generous over time. So looking only at interchange fees gives us a distorted picture.

Now maybe you don’t believe that banks will continue to pass increased fee revenues on to their customers. But notice that this is a symmetrical situation. If you doubt that competition among banks will shift most of the benefits of higher fees to consumers, then you should be equally skeptical of claims that competition among merchants will translate lower credit card fees into lower retail prices…

First, the benefits are limited neither to frequent flyer miles nor to rich people. But more fundamentally, what merchants want is irrelevant, because there’s no reason to think consumers’ interests are more aligned with merchants than with banks. Indeed, you could view the credit-card-issuing banks as agents for cardholders, negotiating for discounts that are passed along to their customers.

The Durbin Amendment only covers debit cards, not credit cards, for interchange regulation.  But I want to address his points about interchange more generally.

Transfers

This argument is predicated on the idea that all people in the United States have access to the high-end consumer credit market. In general, the “two-sided markets” argument assumes a single representative consumer and a single representative business in a closed loop, where value can’t really be transfered in or out. That’s not the real world, where there are multiple payment systems, including cash, debit and credit cards with different prices, and multiple people with different access to credit