By Clive, a UK-based bank IT professional
It’s dispiriting to see those who purport themselves to be progressives ending up looking dumb by overly-simplistic knee-jerk reactions to complex subjects. In doing so, they undermine the cause for all of us.
One such is David Dayen writing at The Intercept on a Supreme Court ruling on card payment competition and the ability of merchants to steer customers into using a particular card scheme’s card. His introduction gives a preview of the remainder of his article:
Amid high-profile Supreme Court rulings like the lifeline given to the practice of gerrymandering, the endorsement of Trump’s Muslim travel ban, the gutting of public sector unions, and the defense of bakers who don’t want to serve gay people, the case of Ohio v. American Express may get overlooked.
But it could prove to be one of the most consequential rulings of the decade, serving as a broad immunity cloak for Silicon Valley giants — and perhaps others — in their quest to utterly dominate the global political economy.
In a 5-4 ruling along party lines on Monday, the court, featuring Justice Neil Gorsuch rather than Judge Merrick Garland, ruled that American Express did not violate antitrust laws when it wrote into its contracts with retailers that they could not offer discounts or enticements to get customers to use other forms of payment.
Dayen’s article was a textbook case of any stick to beat a dog.
Yes, the card networks are known historic bad actors and potentially parasitical. From a US perspective, credit card interchange fees are high — here, for example is Mastercards’s fee schedule which is complex (complexity being a feature not a bug) and compares poorly to the capped fee of 0.3% per transaction which the EU insists on for Mastercard and Visa when operating in an EU member state. And American Express’ (I’ll refer to them as AmEx from here) is even higher. AmEx fees are shrouded in merchant-specific contracts but interchange fees of up to 5% per transaction are normal.
But they aren’t a scam, they do deliver an identifiable and useful service. The cost of goods (or services) sold therefore has to be paid by someone, somewhere. Writers who style themselves as progressives, or consumer champions, or defenders of competition or whatever must be careful they don’t descend into thinking you can have something for nothing.
The Supreme Court justices obviously also wrestled with this topic, hence the heavily divided majority decision. The Swedish Competition authority wrote what is considered to be the definitive work in this sphere. Even a cursory skim through that report demonstrates how many moving parts there are in this debate. In the end, most jurisprudences have come down on the side of the card schemes, as the Swiss National Bank (SNB) deftly put it (emphasis mine):
Any restriction [on fees, acceptance and equal prominence requirements] should be based, not on the laws of normal markets, but taking into consideration the peculiarities of two-sided markets and the complex relationships in payment card markets.
Dayen lambasted the court for inventing special rules just for AmEx:
But [Justice] Thomas, writing for the court, ignored this evidence of anti-competitive conduct and determined that credit card markets were special because they catered to both retailers and cardholders. “Credit-card networks are best understood as supplying only one product — the transaction — that is jointly consumed by a cardholder and a merchant,” Thomas wrote. “Accordingly, the two-sided market for credit-card transactions should be analyzed as a whole.”
Thomas’s “two-sided market” claim is an invented rule, conjured specifically to aid American Express in its quest to extract maximum revenues from retailers. “I am not aware of any support for that view in antitrust law,” wrote Justice Stephen Breyer in a scathing dissent he read partially from the bench.
But courts, regulators and the industry itself has consistently identified, as did the SNB above, that card payments when viewed as a market is peculiar. There’s no point in trying to reduce it to the level of a girl scout selling her cookies at a stall, which is what Dayen wanted the Supreme Court to do.
Dayen also accused the Supreme Court of using industry-paid for studies:
The ruling relied heavily on papers from economists who were paid by the credit card industry.
But this is simply not true for European research which was undertaken by every major European regulatory authority. While academics and economists are certainly not infallible, when they study the question of card interchange fees and the effects of the various cards schemes’ rules, it is obvious even to a humble user of these products that to try to adopt a simplistic buyer-and-seller model is insufficient.
The US Supreme Court is merely following current internationally accepted theory on this. There are competing schools of thought, as the Swedish competition authority paper makes clear. So every time someone comes down on one side or another (and a court has to make a judgement; it can’t hedge its bets in a legal matter) you get wailing and gnashing of teeth from people who hold the opposite view.
And the nub of this case was that the complainants simply didn’t reach the required burden of proof to show AmEx’s scheme rules caused harm. If AmEx cardholders or merchants don’t like that scheme, they can use another one. There is competition, albeit limited. And if the card schemes, collectively, make their proposition sufficiently unattractive to their customers, be they cardholders or merchants, then there’s always cash (with the small proviso that for big ticket purchases you’d probably always want the benefit of the protection a card payment gives you; then you are demonstrably getting a benefit so you do have to be prepared to pay a premium for it — you’re then only arguing about the level of the fee, not the levying of it or how the card scheme provides that service, or the quality of the service — and these are different arguments).
The Supreme Court correctly in my view identified there was a cost balloon which could be squeezed by either the merchants, the cardholders, the card issuers or the card scheme (AmEx, here) but the existence of the balloon and the amount of air in it were appropriate or, if it was inappropriate then the claimants didn’t make out a sufficiently strong case to prove that.
The merchants wanted to try to squeeze the balloon at “their” end by subscribing to the AmEx scheme (which would bring them benefits because they’re able to accept AmEx cards — and AmEx is an interesting participant in this market because they have a target cardholder cohort in the more affluent/higher transaction value/greater average revenues per cardholder segment so merchants may well want to court AmEx cardholders for this reason alongside other card schemes), but then being able to dissuade AmEx cardholders from using a card in that scheme at their whims.
For example, they might be happy to accept an AmEx card on a high margin item, like a jewellery store selling a bespoke diamond ring where the design and workmanship resulted in an item whose retail price greatly exceeded the raw materials it contained but where you had a customer who simply wanted to by gold and pay only more-or-less the current spot market rate then the jeweller might say to use a Visa or Mastercard instead for that kind of commodity purchase.
The Supreme Court said no, that was merchants trying to have their cake and eat it too.
Dayen missed the subtleties of this case completely. So his solution — allow merchant dissuasion when they got a card presented they didn’t want to accept but all the while making a claim that they would accept those sorts of cards — is similarly muddle headed. Fee gouging could, if present in a market, to be dealt with by price controls such as fee caps (like the limited stick of wet celery lashing that Dodd Frank did in the US or the much more meaningful measures the Competition Commissioner took in beating up Visa, Mastercard and AmEx here in the EU). And monopoly suppliers should be either under state ownership or else regulated as natural monopolies.
For consumer finance, delving a little deeper, the entire ownership model could be reassessed. Instead of accepting whatever exploitation the card schemes see fit to mete out to us, a Post Office bank with its own non-cash payment scheme could be created. This could then be subject to whatever rules Congress sees fit to run it under, which is surely far better than allowing the Too Big to Fail banks and the card schemes to do their worst, then retroactively try to get the courts to intervene — which is exactly what happened in Ohio vs. AmEx.
This needs legislative action. If the barrier to that legislative action is lawmakers beholden to big business special pleading, then the correct course of action is to address the failures in the political process. It is not to grab hold of another completely different remedy, such as antitrust, then try to squeeze and contort that into the box you want to put potential miscreants in.
If there’s an oligopoly or duopoly then yes, under these circumstances, antitrust action is appropriate but there, as the Supreme Court confirmed, you have to meet the bar of showing consumer harm resulted from anticompetitive behaviour.
Dayen also showed he’d — unwittingly perhaps — drunk a tipple from the neoliberal Kool-Aid in his insistence that where there is a product or service, such as card payments, Uber, Facebook and so on, that people are somehow compelled to then use these and if these products or services are awful, then courts should be quick to step in and enforce better behaviour on the part of their suppliers. But this line of thinking buys straight into the fallacious idea that we’re helpless and hapless recipients of whatever capitalism deems fit to foist upon us.
Not so. We can lobby, boycott, sabotage and use what’s on the market in ways which the product or service vendors never anticipated or can’t control. Merchants can stop accepting AmEx. Don’t use Uber. Refuse to visit a website that wants you to sign in with Facebook. Throw your Alexa in the trash if it tries to sell you something, or just throw it in the trash anyway. There’s something faintly loathsome about the suggestion that commercial concerns can put something in front of you and, however bad it turns out to be, you’re merely the passive recipient of whatever terms and conditions are attached to it and have no recourse short of litigation.
In summary, the claimants in Ohio vs. AmEx had a triable case but it was always a weak one. No doubt it seemed less onerous than attempting to get Congress to act further on card fees.
That still didn’t make it the right thing to do. The Supreme Court considered the law, AmEx’s conduct and the facts of the case which was made out to it. It then upheld the law of the land which is what it is there to do. If you don’t like the law or you think that regulation of a particular industry isn’t sufficiently strong, you should vote for politicians who will change that. If you complain that politicians who will do that don’t exist, consider how to bring about a few more like Alexandria Ocasio-Cortez. Please don’t, as Dayen did, succumb to the notion that tech, so-called innovation and the financialisaton of everything is inescapable.