EES AND THE
Todd J. Zywicki
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 systemsthrougha 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 feecurrently 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.
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 email@example.com.