Misinformation on interchange fees

[HT: Marginal Revolution and Yglesias] Todd Zywicki has written what amounts to an extremist analysis of the impact of interchange fee regulation. It uses the Australian experiment in a very selective and misconstrued way. For example, Zywicki writes:

A recent analysis of the evidence by economist Joshua Gans concluded that, in fact, there was no discernible reduction in the use of credit cards in Australia after the change.139 If that is true, and if there has been no discernible decrease in retail prices, the net result of Australia’s intervention will have been to simply redistribute wealth from consumers to merchants with no apparent offsetting social benefits.

Actually, that is not what was found. It was found that the capping of the interchange fee likely did have an impact on retail prices and that the net effect was no redistribution of wealth from consumers to merchants. Zywicki argues that, in Australia, the reforms harmed access to credit. But that is clearly not the case. Credit card usage remains undiminished as a result of the reforms. Also credit card debt was undiminished so there is no evidence of a difference in the composition of card users. Instead, it is better to say that the intervention was broadly ineffective. But that also means that big concerns of its negative impact in the US are unwarranted when looking at the Australian example. Basically, the broad conclusions of the paper are flawed.

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  1. Joshua:
    I’ve read your paper carefully and, I apologize if I missed it, but where do you demonstrate a discernible decrease in retail prices as a result of interchange regulation?
    I see you assert on page 10 that you would expect that some of the cost saving is passed through but where do you show that any such amounts actually have been “discernible”–noticeable, large, or measurable, much less that they outweigh the unambiguous losses to consumers from higher costs of using payment cards?
    Certainly I don’t want to misrepresent your empirical findings, but I just didn’t see any evidence of pass-through in your paper or measurement of the size of any gain to consumers relative to their losses.  Certainly you would admit that it is equally feasible that the wealth transfer effect to merchants is also present (their prices fell) and that the relative size of the wealth transfer versus pass-through is ambiguous a priori and not susceptible to resolution through a priori assertion.  In which case it seems like the issue is one to be resolved by empirical evidence.
    Again, sorry if I missed this somehow in your paper.  I’ve read it several times though and I just don’t recall you finding a discernible reduction in consumer prices.

  2. Todd, actually the paper you quote from is a submission of mine to the RBA that itself quotes from this analysis by Richard Hayes (https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=IIOC2010&paper_id=356). In that analysis, retail prices are not observed directly but what we do know is that credit card usage did not change. We also know that merchant fees dropped by the interchange fee amount. Put those together and unless you believe that consumers are stupid, that means they must have understood that the relative prices of credit and other payment means did not change. This does not require a retail price effect if retailing is workably competitive.

    So, no, I do not think there was a wealth transfer effect as I cannot see where the wealth would have come from. In your paper you claimed the Australian experiment showed that the cost of credit cards was damaged by the actions. The data simply does not show that.

  3. Ok, I see, this is the same discussion you were having with Geoff Manne at the time of the blog symposium.  Then, as now, if consumers are paying more to use cards (e.g., higher annual fees) and there is no retail price reduction, then as Geoff said at that time, then I don’t see how that isn’t a wealth transfer from consumers to retailers.  The use of payment cards is Coasian and you can have wealth transfers within that.
    More generally, I had thought you had implied that you showed a decline in retail prices as a result of interchange fees.  I understand you to now be saying that you do not actually demonstrate any decline in retail prices nor could any decline be shown in your data, so I apologize for misunderstanding your claim.
    In which case then it is correct to say that that there has been no empirical evidence that actually shows a discernible decline in retail prices as a result of interchange fee price caps, right?  If so, then I’m not sure why you are saying that what I said is inaccurate.  I relied on your work for the showing that there was no decline in credit card usage.  And your paper provides no evidence at all on what happened on retail prices.  I relied on Stillman and the absence of any contrary evidence to claim that there has been no empirical evidence of a discernible reduction in retail prices.  So where am I providing “misinformation”?  I assume you are not saying that your simple assertion that you believe that there must have been significant pass-through is evidence of that it happened, are you?

  4. Wealth transfers require that the total amount of money moves from one group to the other. You claim consumers are paying retailers. How can that be? Consumers would have to face higher credit card charges yet not be able to substitute to anything else. But they can use cash, checks etc. So why can consumers just be extorted. Is your claim that the card associations use market power? If so, then surely you are in favour of regulation? It seems to me that you haven’t got your theory down.

    In terms of misinformation, I objected to the claim that credit cost had risen in Australia. I don’t see how as quantity has not changed. Unless you believe that demand curves for credit are perfectly inelastic, it must be that costs to consumers have not risen. On my reading, it seemed your were selectively reading the evidence without putting it together in an economic framework. But then again, in this industry people do that all the time.

    The Australian experience tells us something about the US: that regulation is likely to be innocuous and so you can choose your criteria — hands off or take out insurance just in case it isn’t. Second, that getting rid of the no surcharge rule is likely to be the more important reform.

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  7. Josh:
    Let me make sure I have this right: your claim is that interchange fee regulation in Australia resulted in no increase in annual fees, no shortening of grace periods, and no increase in behavior-based fees.  And you know this even though you have no direct evidence of prices.  And those who claim that consumer credit costs, such as annual fees, simply imagined that?
    I had assumed that you meant that retail prices fell.  I can’t believe you are arguing that annual fees and other pricing changes did not result.
    If that is your argument, without a single shred of price data, then you simply haven’t shown what you believe that you have shown.

  8. No that is not my claim. My claim is that prices changed but behaviour did not. So annual fees rose, grace periods fell and rewards fell. But credit card usage did not change because the total costs didn’t change; implying an adjustment to prices at stores offering cards.

    I believe that there is a demand curve for credit cards that is elastic so that when the total cost of credit changes, behaviour changes. Some components of that cost went up but behaviour did not change.

    So are you denying all of the data that shows that behaviour did not change?