naked capitalism

Although we were big fans of the HuffPo piece yesterday on the DC war over debit card regulation, Adam Levitin was a bit less happy since the article focused on the politics and was thin on why the card fees were burdensome to merchants.

Although a few readers tried arguing the bank position and did not get a terribly enthusiastic reception, Levitin explains the real problem: the actions of the Visa/MasterCard duopoly are pretty clear antitrust violations, but as he pointed out via e-mail, the US pretty much does not do antitrust any more. The Chicago school of economics indoctrination of judges via an orchestrated “law and economics” movement (see ECONNED for an overview) has resulted in judges not seeing competitive problems anywhere. The Department of Justice has lost a slew of recent antitrust cases at the Supreme Court, so they’ve lost the appetite to pursue them.

But (to give an indication of how bad the behavior of the card networks is), the normally supine DoJ has been active in payment cards. It sued Visa and MasterCard over their their “dual exclusivity rule” (allowing merchants to use either one, but barring Amex and Discover) and won. Last year the, DoJ sued and immediately settled with the two big networks on credit card swipe fees.

Levitin explains in a new post what the antitrust issues are:

Merchants think lots of costs (fuel, electricity, etc.) are too high. But what galls merchants about swipe fees is that they have no ability to negotiate over them as they do with other costs of business. For example, Home Depot can’t get lower MasterCard swipe fees by making it the “top shelf,” preferred payment method. And merchants can’t pass along swipe fees to card-using consumers. Payment card network rules say that they have to pass it along to all consumers. These rules are the problem.

It’s as if Visa and MasterCard both operated parking lots that surrounded a WalMart. WalMart can’t really operate unless there’s parking for customers, and it won’t be unreasonable for those customers who park to have to pay for it. Similarly, it wouldn’t be unreasonble if WalMart wanted to offer free parking and to spread the costs to all of its customers.

But that’s not how the MasterCard-Visa parking lot works. Instead of charging those people who choose to park in the lot for doing so or just charging WalMart and letting it do whatever it wants in terms of passing on costs, MasterCard and Visa instead tell WalMart that it is forbidden to charge consumers who use the parking lot more than those who don’t. So WalMart has to charge all of its customers for using the parking lot, even if those customers who walked, took public transit, helicopter or parachute. That’s the antitrust problem–you can pick your friend, you can pick your nose, but you can’t pick your friend’s nose. Same goes for prices. You can pick your prices, you can pick your business counterparties, but you can’t pick their prices. Call this the booger rule of antitrust.

Not surprisingly, US merchants pay substantially higher swipe fees than anywhere else in the developed world. Think that ain’t a tax on the economy Grover Norquist? Or is it OK because that tax is exercised by banks, rather than the government (maybe Norquist recognizes where sovereignty really resides…)?

Aside from finding explanatory value in Wrestlemania III (a taste I must say I do not share, my appetite for trash runs to action movies), Levitin also recommends Dora the Explorer for her animal-themed Swiper.

And while we are in explanation mode, readers were particularly keen about this debit card comment from readerOfTeaLeaves on the economics of debit cards in yesterday’s post:

Allow me to offer a perspective from ‘the eComm layer’, as well as from my acquaintance with several small, locally-owned, hard-working businesses who actually **innovate** and create new products and services (some of whom have sunk a fair chunk of their revenues into trying to develop eComm components to better serve their local communities and customers).

You state that: And it’s not a tax. It’s a fee paid by the merchants in exchange for the cost savings that debit and credit cards represent. The merchant who gives away free bananas in protest of merchant fees (see the article) is an idiot.

I agree this is not a ‘tax’. It is a FEE.

If a merchant accepts cash, they don’t pay a percentage of the transaction based on the amount of the purchase; with most kinds of cc’s (credit cards) and dbts (debit cards) that I’m aware of merchants are extracted a percentage of the transaction. That is a FEE. It is pure, utter extraction.

That transaction doesn’t cost the bank more to process based on whether the amount transacted is $50 or $800 or $3,000. Yet, depending on the amount transacted, the banksters take a ‘cut’, a FEE. They do not innovate, invent, or create to get that FEE — they only get it because they have the power (and legislation) to do so.

Meanwhile, don’t forget that the banks are also charging the customer for that very same transaction: in short, the banks make money off both sides of the transaction. Yet we aren’t hearing about that from the banksters, now are we…?

You lose all credibility with me when you state: Merchant card fees cover both the costs of fraud and convenience. And it is most certainly NOT free for the banks. The infrastructure costs are on the backs of the banks, not the merchants

If you honestly believe this, you are seriously misinformed.

Small retailers (including every restaurant in the nation) pay when there are fraudulent cards. The system **should** notify the retailer at the instant of swipe if the card is fraudulent, but it does not always do this. But it gets worse: if a retailer swipes a card and that data is not encrypted, or the network is not fully secured, then the retailer eats the costs — at least, the retailers that I’ve heard gasping in shock have ended up eating it. One retailer that I know – a small operation – having spent tens of thousands for inventory software and a whole new cc/dbt system, just ended up spending **more** tens of thousands of dollars to purchase all new swipe machines that encrypt **at the instant of swipe**. Did the banks provide those machines for free to the retailer? Not a chance. Did the banks provide any kind of discount to retailers using those new encryption devices? Not a chance.

As for ‘innovating banks’, that’s an oxymoron.

I’ve written eComm code, and I’ve worked in the eComm layer and the very notion that banks innovate is ridiculous. They have done their utmost to control and capture eComm technologies, but that does **not** make them innovators. Nor does it make the credit card companies innovators (!). It makes them what they always were and always will be: agents who cream profits from transactions. They happen to be at the point where the money changes hands, and they take advantage of that fact (in an exploitive fashion, I will add).

What Congress does not appear to understand is that if they side with the banks, they are damaging the vitality of small and medium sized businesses who actually **innovate** — whether it is a local farm that wants to offer an organic produce service, whether it is someone setting up a new merchant site via Amazon’s services, or whether it is a salon chain that wants to offer people the chance to buy a Mother’s Day gift card online. All those people actually **innovate**, provide personal services, and create the economic exchanges that allow for cities to have budgets that pay for schools, roads, cops, etc.

There is no reason — economically — for banks to stick businesses with the costs of fraud over which they have no control, to stick businesses with extractive ‘percentage’ fees of transactions, or to play both sides of every transaction by charging BOTH the payer and the payee.