The U.S. Department of Justice, Visa and MasterCard have had a settlement approved by the US Courts. Broadly speaking, this means that U.S. merchants will now be able to:
- let customers know the different costs (to the merchant) associated with different cards that the customer might use for payment;
- represent a preference for some type (or types) of card to customers; and
- give discounts off the standard price for particular cards.
The interesting thing for Australia’s regulators is not the decision but its implementation. In Australia, card surcharging is allowed and may be leading to price discrimination. See my post here. In the UK, the use of debit cards as the ‘base’ or numeraire instrument for internet transactions is being investigated – see here. So a key difference between the three situations is the choice of ‘base price’ or numeraire and how the price differential for cards is expressed:
- (Australia) The base price is ‘cash’ with the ability to surcharge from that base price.
- (UK) The base price for internet transactions could be debit cards with the ability to surcharge from that base price.
- (US) The base price the ‘highest card price’ with the ability to discount off that price for other cards and cash.
Simple economics would normally say that there was no difference between these three situations. It is simply changing the numeraire and the customer will correctly work out the pricing from whatever base is used. For example, the customer shouldn’t care if an item is $100 cash with a $5 card surcharge or $105 for card with a $5 cash discount.
However, clearly US law makers do not agree with this view. Despite the settlement today allowing for the more extensive use of discounts, the ‘economically identical’ policy of using cash as the base price and surcharging for cards is explicitly outlawed in ten states.
So, what are the implications? Either the US law is silly and is effectively simultaneously banning and promoting economically identical conduct. Or consumers react differently to surcharges and discounts.
Now, I suspect that my behavioural economics colleagues will shake their heads and tell me that there is a well known experimental literature on the later (and if someone has a good reference – please post a comment).
However, if this is the case, then it has implications for credit card reform in Australia. In particular, as I noted in my earlier post, should the Payments System Board be thinking about defining the numeraire in, say, internet transactions, rather than thinking about capping surcharging?