The Booger Rule of Antitrust in the Debit Card Fight

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.

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  1. john

    I particularly enjoyed watching this excellent stuff from readerOfTeaLeaves unfold yesterday in the face of an obvious bankster troll. It nicely punctuated the end of that thread!

    In the spirit of expansion rather than quibble I would just add that it is not that Congress does not understand the public interest here, it is that they simply don’t give a shit.

    If you’re not on the grifter treadmill shoveling our public servants cash you are not engaging with our political market place and have no reason to expect it to be concerned with you. No money? Tough luck. Go organize….

  2. liberal

    It makes them what they always were and always will be: agents who cream profits rents from transactions.

    Substitute “rents” for “profits”.

  3. abelenkpe

    Why doesn’t the US do anti-trust anymore? Clearly there are competition problems in media, health care and finance, yeah?

    1. DownSouth

      I don’t think “are” or “is” even enter into the equation.

      Factual reality is anathema to legal and economic theories that are not only wrong, but also purpose-driven.

      As David Sloan Wilson puts it:

      When the only purpose of a belief system is to provide a blueprint for action, any and all aspects of factual relatiy are fair game.

    2. john

      Barry C. Lynn’s “Cornered” is an excellent look at this issue. Yves looks at also in “Econned”

  4. BenE

    “. 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.”

    It’s even worst than that. Banks often offer 1% reward points (e.g. airmiles) as a kickback to those using their credit cards.

    The cost of using credit cards is actually heavier on those who do not use the cards than those who do because the former don’t get the reward points.

    In the parking analogy. It would be as if the the MasterCard-Visa parking lot charge Walmart 6$ every time someone used a parking space, they forced Walmart to distribute these costs to everyone who shopped there and then gave 2$ coupons to those who used a parking space in order to maximize the utilization of the lots and discourage people from walking. It’s sickening really.

    1. Fraud Guy


      And they then charge merchants a higher rate for rewards cards, and they can’t opt out of them.

  5. lyman alpha blob

    The comment from readerofTeaLeaves is spot on.

    I work for a merchant and deal with these companies all the time. I can see a small transaction fee for each charge for services rendered but the fact that these companies get to charge that fee PLUS take 2-3% of every dollar charged on top of it, whether it’s for $100 or $10,000 is nothing but parasitism pure and simple. It makes no logical sense that these companies can make $3 of a $100 charge and $300 of a $10,000 charge for performing exactly the same service.

    And then there’s the issue of credit card fraud and I’m pretty sure the poor poor credit card companies are doing just fine off of fraudulent transactions. Few years ago my business had a customer wanting to charge $10K. We called the credit card company to make sure the card was valid before running the charge and were assured that it was. Few weeks later we get notice saying the card we’d run had been stolen and they were taking the $10K back. That’s bad enough already since we had done our due diligence and we still out a whole lot of $$$. However we never got $10K deposited into our account to begin with – because of the fee involved we only got ~ $9700. And yet the credit card company charged back the whole $10K!

    What this means is that not only do the credit card companies place all of the onus on merchants for fraudulent transactions, they are actually turning a pretty damn good profit on those transactions by refusing to return the fees they charged for it in the first place!

    I’ve thought for years that this practice of profiting from fraud was ripe for a class action suit against these parasites.

    Lawyers take note.

    1. Some reader

      Ripe for a class action suit? Yes
      Lawyers take note? Not after today. See the links section of this blog today where there is a link to article about how the Supreme Court ruled that class action suits cannot occur when there is a contract of adhesion requiring binding arbitration.

    2. Fraud Guy

      Lyman Alpha Blob,

      Actually, for Visa and MasterCard, when the chargeback hits, the merchant gets a refund of the interchange rate, but not of the interchange fee, the authorization fee, the deposit fee, or other fees, and there is a chargeback fee on top of it.

      So, say for your $10,000 transaction, if this was at the company I used to work for. They would have been charged a $.02 auth fee, a $.04 settlement fee, at max a 2.65% interchange rate + $.10 interchange fee, for a net of $9734.84. In the month the chargeback came in, their interchange would have offset the $265 from the interchange rate, + a $5 chargeback fee, so the net loss would be $10000 + $5.16.

      If your friends processor is not refunding the interchange on chargebacks, they are doing something wrong. If they are charging more than 2.65% on a Visa/MasterCard transaction, they must be a low volume merchant (under $100.000.000 annual volume). If they were charged 3% on a card swipe, they’re getting ripped off by their processor.

      Discover charges based on gross sales for the month, and Amex has variable pricing schemes based on your volume, but higher volume merchants get their interchange applied against net sales.


      Fraud Guy

  6. Dave of Maryland

    I thought WalMart & Home Depot as examples were hilarious.

    Both import the cheapest stuff they can find, pay dirt for wages, take all the profits out of the local community, back to Bentonville AR (or wherever) and we’re supposed to cry that they’re getting squeezed by the banks?

    I was also amused by the merchants who invested big bucks in sooper-(sucker)-secure swipe machines.

    I am a mail order outfit. Cards supply 95% of my monthly income. Without plastic, I’d be panhandling on the street. But I swipe less than 1%. Cards are keyed manually, the expiration date manually, the 3-digit code from the back manually, the numbers in the address & zip codes keyed manually. This is standard mail order stuff, which not all processors support to begin with. I run a Trans 380 which is at least five years old, if not ten.

    This ought to give the security crowd a heart attack, but the actual security problems are with Visa/Mastercard & the major merchant processors, because that’s where all the cards are. Sitting around on hard drives with varying degrees of security. Not the one phone call out of 10,000 that has numbers on it.

    From time to time my processor sends me alarming letters that I should “upgrade” my equipment because of “security risks”. If this was true they would follow up with “upgrade or we will chop you off” notices. Which I have yet to get. It sounds like a sales scam to me.

    Yes, when you take strings of numbers off the internet from total strangers, you need to exercise extreme caution. When you’re a seat-of-the-pants mom & pop outfit like me, the risks are real.

    Fees per transaction vary according to who you are. Costco offers merchant services at rather cheap rates, except they insist all cards be swiped. I’ve worked with a mail order specialist (merchant processor) the last dozen years & kept my nose clean & get nearly as good a rate, but you have to put in your time, prove yourself, and then ask for it.

    This is how the system works: I charge the card, my processor approves the transaction & puts money in my account & transfers the result to Visa/Mastercard, who physically bill you. Visa/Mastercard set the terms. Processors & merchants have to manage as best they can. It is not unheard of for processors to go bust. Nor, if my experiences are a guide, is it unheard of for the processor to offer freebies to keep good merchants.

    This is not pro- or counter- the banks. On the one hand, I’m happy the system exists as otherwise I’d be homeless without a family. Unlike WalMart & Home Depot, I sell Made-in-America books, I sell them nationally & internationally, and I spend the bulk of my money here in Harford County, Maryland. Which makes me a net importer of money to my community, and that’s rare. On the other hand, bankers are scum & we would all be a lot better off if they were state-run utilities, rather than private profit centers.

    As matters stand, a few flowers grow in the stony soil, crowded for space among all the weeds of come-ons & porno. A better banking system, a better financial system, and instead of a flower here & there, a thousand flowers could bloom. Imagine that!

    But that’s not going to happen. Not ever. Increasingly I wonder why we waste our time in this pointless analysis. The only reason is if we can arrive at an understanding whereby we can then take action. As far ahead as I can see, I cannot see that we are on that track.

    1. Fraud Guy


      Actually, the reason they want you to upgrade your equipment is likely due them wanting to lease or sell you new equipment. A merchant processor I worked for literally made pennies on processing fees versus the dollars they made on equipment markup and deals with lease finance companies.

      Probably better off finding a used, but more recent vintage terminal that is compatible with your processor and that they can then load with their processing software. Most will do that, though there may be a nominal charge depending on your equipment.

    1. Yves Smith Post author

      That’s out of line.

      This site does analysis and commentary, not journalism. And we never said we were comprehensive.

  7. lambert strether

    The very definition of “rent”:

    I agree this is not a ‘tax’. It is a FEE. … It is pure, utter extraction. [T]he 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.

    In the punchline to the old joke, “because they can.”

    This is a rentier state. It’s all about the rents. Let’s have a rent party….

  8. WML

    My understanding of the “booger rule” was that for there to be a anti-trust violation, the contract restriction had to be designed to shore up the monopolist’s monopoly, or gain a monopoly in another market. If the restrictions on the buyer are harmless, or simply benefit the end consumer, etc., then there is no antitrust violation.

    That means, the mere fact of the monopolist signing contracts with strange restrictions on the behavior of the buyer isn’t enough for a violation. There would have to be a long drawn out lawsuit where the contract clause was shown to be anti-competitive.

  9. Joyce

    A merchant friend gave me an interesting perspective on accepting credit card payments from customers. His average sale to customers is $3,000 of which he tries to achieve a 10% profit ($300) after the cost of materials (in this case, flooring), labor (installers), and overhead. The average card fee is 1% of the gross sale, in this example $30, leaving him with $270 net after paying the fee. That means the credit card company has garnered 10% of his hard earned profit. That’s an expensive partnership!

    Here’s my experience as a customer. My credit card offers me 1% cash back on all purchases without limit. Every three (3) months they have a special offer of 5% cash back on specified items. From April 1 through June 30, 5% cash back is offered on purchases of to $1,500 spent on: Home Improvement, Lawn & Garden, and Home Furnishings. The previous three (3) months were: Groceries, Pharmacy, and General Merchandise Department Stores! Who pays for these cash back incentives for me to use my credit card? The financial intermediary is one of six giant, mega, monster banks.

    1. Fraud Guy


      About 4 years ago, Visa and MasterCard rolled out a program where they increased rates to merchants for customers using a rewards card–up to about a 10% bump on the interchange rate, IIRC.

      Unlike the Wal-Settlement at the beginning of the century, where physical merchants could opt out of debit or credit cards at their discretion, since these rates were not in place at that time, merchants cannot opt out and in many cases will not know if the card is a rewards card.

      So, your bank’s largesse comes from the profits of the businesses they are steering you to.

      Happy shopping!

  10. Nathanael

    I’ve noticed that many, if not most, local merchants will offer straight-up discounts for paying in cash. It is apparently impossible for the credit card companies to stop them from doing this (thank goodness).

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