Most of the time, I try to stick to writing up the worst abuses in the generally corrupt realm of financial services, but it’s important not to overlook the nickel and diming. First, if done on a big enough scale, it adds up to lots of money, and the amounts at issue are so small that it isn’t worth the trouble to buck the system, even if the practice or the level of charges is extortionate. Second, in the case of Visa and Mastercard isn’t simply the abuse a cozy dupoly (and where is the Department of Justice, pray tell? In Australia, the government has been all over the credit card industry, although some of its measures appear to have backfired). This is an excessively high frictional cost on commerce. Now how come when any brings up Tobin taxes (small charges on every trade) as a way to pay for the bailout and discourage speculation, the financial services industry becomes utterly apoplectic. You can’t interfere in “free markets” (as if licensed and government backstopped capital markets casinos bear any resemblance to fantasized “free markets”). You’ll hurt liquidity (and who benefits from all this slushy liquidity? Higher transaction costs might make fund managers think twice before buying and selling. OMG, they might start acting like investors again! Can’t have that, now can we?). You’ll raise the cost of borrowing (please, this is a real stretch, the spreads on new issues, which is where funds are raised, are much bigger than in secondary trading or derivatives markets, where taxes like this would bite).
Yet here in our very midst, we have a Tobin tax equivalent on a very high proportion of retail trade, in that you can think of the rapacious Visa and Mastercharge charges for debit transactions (disclosure: I’ve done a bit of work in credit cards, and trust me, the charges are egregious) as having two components: the fee they’d be able to charge if they faced some competition, and the premium they extract by controlling the market and refusing to compete on price. In terms of its effect on commerce, this premium is worse than a Tobin tax. Remember, with a Tobin tax, the intent is to throw sand into the gears to dampen speculation. Here, no one is arguing that we should be increasing transaction costs across the board to discourage spending or lower the volume of transactions to merchants, yet it has the same effect.
If you think I am caviling about something trivial, consider this bit from today’s New York Times:
some merchants are infuriated by a separate, larger fee, called interchange, that Visa makes them pay
….each time a debit or credit card is swiped. The fees, roughly 1 to 3 percent of each purchase, are forwarded to the cardholder’s bank to cover costs and promote the issuance of more Visa cards…
Some merchants say there should be no interchange fees on debit purchases, because the money comes directly out of a checking account and does not include the risks and losses associated with credit cards. Regardless, merchants say they inevitably pass on that cost to consumers; the National Retail Federation says the interchange fees cost households an average of $427 in 2008.
Yves here. Now I am a Luddite, I refuse to own a signature debit card and carry only ATM cards (why would anyone carry a piece of plastic that provides direct, unlimited access to your checking account? Have you never had your wallet stolen?) The article details the ways Visa steers customers to simply swipe and sign, rather than punch in a PIN:
When you sign a debit card receipt at a large retailer, the store pays your bank an average of 75 cents for every $100 spent, more than twice as much as when you punch in a four-digit code.
The difference is so large that Costco will not allow you to sign for your debit purchase in its checkout lines. Wal-Mart and Home Depot steer customers to use a PIN, the debit card norm outside the United States.
Despite all this, signature debit cards dominate debit use in this country, accounting for 61 percent of all such transactions, even though PIN debit cards are less expensive and less vulnerable to fraud.
How this came to be is largely a result of a successful if controversial strategy hatched decades ago by Visa, the dominant payment network for credit and debit cards. It is an approach that has benefited Visa and the nation’s banks at the expense of merchants and, some argue, consumers.
Competition, of course, usually forces prices lower. But for payment networks like Visa and MasterCard, competition in the card business is more about winning over banks that actually issue the cards than consumers who use them. Visa and MasterCard set the fees that merchants must pay the cardholder’s bank. And higher fees mean higher profits for banks, even if it means that merchants shift the cost to consumers.
Yves again. So we see the same story here as elsewhere: the financial services industry successfully leeching as much as it can out of the real economy.
And take note of this part:
Merchants said they had no choice but to continue taking the debit cards, despite the higher fees, because Visa’s rules required them to honor its debit cards if they chose to accept Visa’s credit cards.
Yves again. I’m no lawyer, but this looks like a cut and dried case of tying, which is an anti-trust violation. Here is a basic outline:
Illegal tying is one of the most common antitrust claims…Tying arrangements are often considered per se illegal. The basic requirements that must be met for tying to be per se illegal are as follows:
1. There must be two separate products or services.
2. There must be a sale or an agreement to sell one product (or service) on the condition that the buyer purchase another product or service (or the buyer agrees not to purchase the product or service from another supplier).
3. The seller must have sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product.
4. The tying arrangement must affect a “not insubstantial” amount of commerce.
Yves here. Sure looks like those conditions apply. But wait a sec, this matter was litigated, and a settlement was reached…..and the charges still look awfully rich. The result was NOT an end of the tying arrangement, merely the payment of fines, a reduction in fees, and only an end to the requirement that merchants who take credit cards be required to accept debit cards at credit card fee levels. Looks like the class action attorneys chose to max out the cash value of the settlement (on which their fees were based) at the expense of the back end arrangement.