Interchange Fees Impact on Consumers and Merchants

Frank Maier-Rigaud, Senior Economist. OECD Competition Division,

frank.maier-rigaud@oecd.org

3 angles on interchange fees

• “Cost based” or “fee for service” angle

• Regulatory angle– Total welfare, efficiency– Fairness, redistributive aspects

• Competition Law angle– Collective price fixing agreement– Consumer welfare

2 impacts, 2 themes

• Consumers (regulatory angle)– Who gains and who looses from

credit card payments? (Scott Schuh, Oz Shy and Joanna Stavins)

• Merchants and Consumers again (competition angle)– comments on the Tourist Test

Impact on consumers

Idea that cash users subsidize card payers can be traced to Carlton and Frankel (1995)

Frankel (1998) is the first to connect the subsidy to a transfer from low- to high-income buyers

The logical reverse effect (from card to cash) in case merchant costs exceed card costs was shown by McAndrews and Wang (2008)

Schuh, Shy and Stavins (working paper 2011) compute estimates based on a calibrated model of who gains and who looses from credit card usage in the US

Who Gains and Who Loses: key findings

• Schuh, Shy and Stavins (working paper 2011) find two types of transfers among buyers:

• From cash to card users– (from cash and “revolving” card users

to “convenience” card users)

• From low-income to high-income households

Empirical Estimates

• On average, each cash-using household transfers $50 to households that use credit cards and each credit card using household receives a subsidy of $240 every year

• Card users with unpaid revolving debt pay a transfer of $511 and convenience users receive a subsidy of $833

• On average, the lowest-income households ($20000 or less annually) pay $63 and the highest income households ($150000 or more annually) receives $823 every year

Simplified US payment market

Schuh, Shy and Stavins (2011)

EU MasterCard case

• EU MasterCard case: – Article 101(1) TFEU: MIF is a collectively set

price with the object or effect of restricting price competition between acquiring banks

– Article 101(3) TFEU: MasterCard failed to prove that a fair share of any positive effects on innovation and efficiency were passed on to consumers

• EU states (MEMO/09/143) “Of particular importance is the question of whether, in setting a MIF a scheme uses a methodology that aims from the outset at guaranteeing that cardholders and merchants obtain a fair share of the benefits”

• Merchants are consumers of acquiring services

More Commission quotes

• “the ‘tourist test’ provides a reasonable benchmark for assessing a MIF level that generates benefits to merchants and final consumers”

• The revised “tourist test” MIF “was calculated by comparing merchants’ costs of accepting payments in cash to those of accepting payments made by a payment card”

Quo Vadis Tourist Test

• Tourist test is at best a static regulatory benchmark (but see e.g. Schuh,Shy and Stavins)

• If competition authorities believe in their qualification of interchange fees, they should be prepared to embrace the logical consequences

A few conclusions(?)• 2-sided market theory is ingenious, beautiful • The concepts of network and usage externalities

prevail rightly over cost-based approaches• Perfect surcharge approaches are a model

platonic curiosity 41 years after Coase‘s problem of social cost but represent an empirical challenge to competition authorities

• Reliable empirical estimates of the socially optimal IF and social losses associated with lower (or zero IF) are lacking

• Tourist test is (by definition) an unsuitable antitrust benchmark