The NYT has an article about Visa’s practices in the US or charging merchants much more for signed transactions than debit card transactions.
When you sign a debit card receipt at a large retailer, the store pays your bank an average of 75 cents for every $100 spent, more than twice as much as when you punch in a four-digit code. …
Seizing on this odd twist, Visa enticed banks to embrace signature debit — the higher-priced method of handling debit cards — and turned over the fees to banks as an incentive to issue more Visa cards. At least initially, MasterCard and other rivals promoted PIN debit instead.
The issue is that, at the point of sale, it matters to the merchant what payment instrument consumers choose while the consumers may not care (or, alternatively, as Tyler Cowen points out, may be induced by other means to choose signature debit). The policy issue to find a way of making them care.
The problem is that card association rules stand in the way. The ‘honor all cards’ rule required merchants to offer both Visa signature and pin but that was eventually challenged and was removed. As a result, Costco dumped Visa’s signature debit. What that means that, consumers in choosing merchants will have to care about payment instrument and so there is some decoupling.
That, however, is a drastic response. The better rule to subvert would be the ‘no surcharge rule’ that prevents merchants from offering different prices to consumers based on payment instrument. That rule was abandoned in Australia and we see many instances where it bites. In that situation, the strong theoretical prediction is that what fees Visa uses to extract payments from merchants do not matter for overall efficiency; even if they do matter for prices. This is one of those cases where there are relatively simple regulatory interventions to try that could have a big effect.
All of these issues were discussed in a recent Truth on the Market symposium that I participated in. Tyler also updates his post with the following:
When issues of this sort arise, there is a common pattern in blogospheric discussion: Blogger A criticizes a market practice with tones of absolute condemnation. Blogger C (in this case, me!) responds with a plausible scenario, and a microeconomics-consistent first-order explanation, that things aren’t so bad after all. Blogger D tries to defend Blogger A by shifting the burden of proof to Blogger C to demonstrate that markets are efficient in such a case and by leveling charges of market fundamentalism and by citing some second or third best arguments that the market can fail after all. Don’t be fooled by that polemic slide in emphasis; the burden of proof is on the critics here — those asserting the existence of an evil and asking us to move beyond a loose agnosticism — not on me.
In this situation, I appear not to be Blogger D but Blogger E who points out that economics has investigated this and the NYT should have talked to me first.