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The Economics of Payment Card Interchange Fees and the Limits of Regulation

The Economics of Payment Card Interchange Fees and the Limits of Regulation

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Published by GlobalEcon
Dr. Todd Zywicki, Director at Global Economics Group, provides a detailed economic analysis of the regulation of interchange fees on consumers, merchants and banks. In “The Economics of Payment Card Interchange Fees and the Limits of Regulation,” (ICLE Financial Regulatory Program White Paper Series, George Mason University Law and Economics Research Paper Series, 2010), Dr. Zywicki demonstrates that neither economic theory nor empirical evidence support the claim that interchange fees are too high. As Dr. Zywicki concludes, it is difficult to imagine an intervention as poorly-supported by evidence or theory and that would be more damaging to consumers, the economy, competition, and innovation than artificial efforts to restrict interchange fees.
Dr. Todd Zywicki, Director at Global Economics Group, provides a detailed economic analysis of the regulation of interchange fees on consumers, merchants and banks. In “The Economics of Payment Card Interchange Fees and the Limits of Regulation,” (ICLE Financial Regulatory Program White Paper Series, George Mason University Law and Economics Research Paper Series, 2010), Dr. Zywicki demonstrates that neither economic theory nor empirical evidence support the claim that interchange fees are too high. As Dr. Zywicki concludes, it is difficult to imagine an intervention as poorly-supported by evidence or theory and that would be more damaging to consumers, the economy, competition, and innovation than artificial efforts to restrict interchange fees.

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Published by: GlobalEcon on Mar 16, 2011
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07/22/2013

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T
HE
E
CONOMICS OF
P
AYMENT
C
ARD
I
NTERCHANGE
F
EES AND THE
L
IMITS OF
R
EGULATION
 
Todd J. Zywicki,George Mason University School of Law
ICLE Financial Regulatory Program WhitePaper Series, June 2, 2010
 
George Mason University Law and EconomicsResearch Paper Series
10-26
This paper can be downloaded without charge from the Social ScienceResearch Network athttp://ssrn.com/abstract_id=1624002 
 
 
ICLE | 2910 NE 42
nd
Ave., Portland, OR 97213 | www.laweconcenter.org | icle@laweconcenter.org |503.770.0650
ICLE Financial Regulatory Program White Paper SeriesJune 2, 2010
 
T
HE
E
CONOMICS OF
P
AYMENT
C
ARD
I
NTERCHANGE
F
EES AND THE
L
IMITS OF
R
EGULATION
ByTodd J. Zywicki
 
 
i
 
T
HE
E
CONOMICS OF
P
AYMENT
C
ARD
I
NTERCHANGE
F
EES AND THE
L
IMITS OF
R
EGULATION
Todd J. Zywicki
1
 
Fresh off of the most substantial national liquidity crisis of the lastgeneration and the enactment of sweeping credit cardregulation in the form of the Credit CARD Act, Congresscontinues to deliberate, with a continuing drumbeat of supportfrom lobbyists, a set of new regulations for credit cardcompanies. These proposals, offered in the name of consumer protection, seek to constrain the setting of “interchange fees” transaction charges integral to payment card systemsthrougha range of proposed political interventions. This article identifiesboth the theoretical and actual failings of such regulation.Payment cards are a secure, inexpensive, welfare-increasingpayment mechanism largely unlike any other in history. Rather than increasing consumer welfare in any meaningful sense,interchange fee legislation represents an attempt by somemerchants to shift costs away from their businesses and ontocard issuing banks and cardholders. In particular, bank-issuedcredit cards offer a dramatic improvement in the efficiency andavailability of consumer credit by shifting credit risk frommerchants onto banks in exchange for the cost of theinterchange feecurrently averaging less than 2% of purchasevalue. Merchants’ efforts to cabin these fees would harm notonly consumers but also the merchants themselves ascommerce would depend more heavily on less-efficient paper-based payment systems. The consequence of interchange feelegislation, as Australia’s experiment with such regulationdemonstrates, would be reduced access to credit, higher interest rates for consumers, and the return of the much-loathedannual fee for credit cards. Interchange fee regulationthreatens to constrain credit for consumers and small businessesas the American economy begins to convalesce from a serious“credit crunch,” and should be accordingly rejected.
1
Foundation Professor of Law, George Mason University School of Law and Senior Fellow, International Center for Lawand Economics. The author would like to thank the International Center for Law and Economics for an unrestrictedgrant supporting this and other work, and Geoffrey Manne and Joshua Wright for invaluable input and comments.The ICLE has received financial support from several companies and individuals. The ideas expressed here are theauthor’s and do not necessarily reflect the views of the ICLE, its directors, affiliates or supporters. Please directcomments to tzywick2@gmu.edu.

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