Mandated reductions in interchange fees in Australia were supposed to cause retail prices to drop, directly benefiting consumers. The whole idea is that interchange is a “hidden fee” that retailers bundle into their prices, and that a reduction in fees charged to merchants would benefit customers. Sounds like basic, logical thinking that you would find in a high school economics and civics class, doesn’t it? As it turns out, the regulatory experiment resembles a high school lab experiment gone wrong.[From Aneace’s Blog: Has interchange regulation in Australia redistributed wealth in favour of merchants?]
This makes me wonder why we expect any different outcome in Europe. It’s certainly true that IT suppliers are confident in their predictions of jam tomorrow:
The report is produced by Cap Gemini, and shows that SEPA might create “net benefits to payment markets” of €123 billion in six years.[From The FinanSer: SEPA today, SAPA tomorrow]
Of course, it “might” create none at all, so it’s difficult to pass judgement on the specifics of the SEPA provisions, but it’s hard to argue about the benefits of anything actions that create a more efficient market (in which domestic debit schemes with 0.1 percent interchange have been scrapped and replaced with fr more expensive international schemes… oh wait…).
If we’re going to discuss the best way to improve the lot of European consumers, then there are two fundamental options: competition or regulation. This brings us back to the general point: if we want to improve the payments system (by which I mean reduce the social cost of payments, thereby increasing the net welfare) should we expect regulation to be the best way to achieve this?
Professor Steve Worthington published a very detailed review of the Australian situation in the Journal of Payment Systems and Strategy. I won’t attempt to paraphrase his detailed work, except to note that says that “by an ironic twist”, the reforms that were meant to help credit card holders have in fact largely disadvantaged them. First, the reduction in interchange and MSCs has not produced any discernible reduction in the prices charged while some have actually increased because of surcharging. Second, the cost/benefit ratio of rewards cards has titled against consumers, because they now have to pay more to get rewards.
I’m no expert on public policy, and my position is generally that regulators should focus on increasing competition rather than price-fixing, This is partly because price-fixing is a little too soviet for me — and suffers from the same “information problem”, in that the regulators cannot know all of the information that might impact the price of something — but partly because the price-fixing doesn’t change consumer behaviour in the right ways, because it doesn’t have the clear goal of minimising the social cost of the payments system. If it did, then the industry might be able to agree on that central purpose and set about rebalancing the costs and revenues accordingly (which would have the immediate impact of making cash more expensive and therefore making cards and other electronic payments more attractive). Does it make sense to price-fix in one area only, simply effecting the transfer of resources from one set of business to another set of businesses depending on who is best at lobbying?
It’s not clear to me that Australians are much better off because of the regulator’s intervention. Or, indeed, better off at all. I’d be very happy to publish contrary evidence here if anyone has any.
These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]