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The Australian Interchange Experience

posted by Adam Levitin

The New York Times ran a story on the impact of interchange regulation in Australia.  Calling it interchange regulation is somewhat of a misnomer.  The Reserve Bank of Australia in fact acted to bust up anticompetitive private regulation of interchange.  Payments are an area with intense regulation, but that regulation is often private self-regulation.  Thus, what occurred is better thought of as interchange deregulation. 

Guess what?  Interchange regulation is working exactly as one would have predicted.  Consumers who want rewards have to pay for them directly now.  They can't free-ride off of other consumers (using cash, debit, or non-rewards credit cards) to finance their frequent flier miles, etc.  Not surprisingly, annual fees have gone up for rewards cards.  This has also pushed consumers toward greater debit card usage, which is often a healthy thing.  (To be fair, there is a similar move to debit in the US without interchange deregulation, so the causation in Australia is questionable.)

A predictable problem has arisen in Australia, however.  Some merchants are now imposing credit card surcharges that are greater than the cost of accepting credit card transactions.  This isn't good for consumers.  But it isn't a problem with interchange regulation.  This is just a symptom of less than perfectly competitive markets in other areas of the economy.  Excessive surcharging is most likely to appear in the least competitive areas of the economy. 

Thus, it's not surprising that the example given in the New York Times story is of an excessive surcharge levied by Qantas; there's pretty limited competition in the Australian airline industry.  But do we really think that the only place that Qantas extracts what economists call "monopoly rents"--the higher price that a company with market power can charge--is on credit card surcharges?  Surely Qantas' is also gouging consumers on ticket prices too.  At worst, Qantas is able to gouge consumers more because a separate credit card surcharge is a less salient to consumers than other price points. 

Still, consider a classic local monopolist--the tow truck driver who comes to jump your car on a dark night in a deserted rural area.  He's going to gouge you regardless of whether you pay with a credit card.  If you pay with a card, the gouging might be in the form of a card surcharge, but the problem isn't his ability to surcharge; it's his monopoly power.  In other words, in a surcharging system, there will be some merchants who over-surcharge consumers, but the problem there isn't surcharging, but uncompetitive market sectors. 

The other issue with the Australian reforms that the card networks have emphasized is that lower interchange has not been passed on to consumers in the form of lower prices at merchants.  To be sure, we haven't seen prices fall say 50bp across the board in Australia.  But there's no reason to expect to see such an obvious impact.  Interchange is one of many factors affecting merchants' pricing.  To the extent that a merchant is in a competitive industry, and its costs of doing business fall, one would expect the savings to be passed on to the consumers. 

If Australia is like most economies, however, there are many less than perfectly-competitive sectors, and reduced interchange costs could easily be offset by other cost of business increases. Additionally, prices are not normally static; they tend to move upwards (inflation).  So one question would be whether interchange regulation has manifested itself in slower price inflation, rather than price reductions.  It would be very difficult to tease out slower price inflation, just as it would be to isolate the impact of interchange on pricing.  That sort of incidence analysis is simply too complicated to perform.  Therefore, it's hard to import too much meaning to the lack of visible price changes in Australia after interchange regulation; there's no reason we should expect to see them.

Finally, it's worth recalling that interchange rates in Australia started off much lower than in the US, and still fell by almost half due to the RBA's reforms.  Unless there is some reason why interchange should be inherently higher in the United States (and I do not know of any such argument), one can envision a much greater decrease in interchange in the United States if we had similar reforms, and, presumably, greater net consumer benefits. 


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A couple of blogish articles on this issue:


Monday, May 05, 2008

Has interchange regulation in Australia redistributed wealth in favour of merchants?


Nov 27 2009, 12:30 pm by Mike Konczal

Should the US Reform Interchange Fees on Credit Cards?

First off, you are a bit wrong and right when you talk about free-riding of consumers who pay cash and use non-rewards cards.

The merchant does NOT have to accept credit cards, in a free market business that is a choice, if the merchant wants a credit card, he/she should pay a fee, Australia has low rates. Now, if a credit card gets lost or stolen, the MERCHANT STILL GETS PAID, credit cards enable increased business, less chances of tax evasion,

so there is a benefit to the business, the author is not making much of a point here, there is a issue of monopolistic behavior of visa and mastercard, but the merchant does not have to accept cards and many don't.

Merchants will not necessarily pass on the savings to consumers, and banks will pass on the costs to NOT ONLY CREDIT USERS BUT CREDIT UNIONS, CHECKING FEES, ETC

The Merchants, want a "free or reduced ride" and use misnomers such as "consumers for competitive choice" , you really think wal-mart and 7 eleven will pass on savings to consumers no, employees , maybe , maybe not , they might just pocket the money to themselves.

They don't have to take credit cards, unlike checks there is guaranteed payment for the most part, the author fails to miss the point,

special interests ask people in Washington for special favors , whether it be the banks (recall the bankruptcy act of 2005), the merchants.

I do agree that reforms in the credit card law ARE necessary such as a payment due date falling on a holiday.

But be careful and research not only both sides of the issue but what is at stake, and what special interests are involved especially in a contractual relationship.

A credit card-merchant business is contractual, its not just that what about dealers such as in electronics who's suppliers set minimum prices do you support congress interfering in contractual and business relationships.

Its interesting but accusations and not understanding the issue and what really is going on make people's arguments and postings be called into a lot of question.

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