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Interchange and Elections

posted by Adam Levitin

American Banker has a really interesting article about the way the interchange fight is affecting the reelection prospects of Sen. Jon Tester (D-MT), which could decide the control of the Senate in the next Congress.   (Also worth reading is this piece in The Hill that shows a pretty direct connection between Tester's advocacy of a bill to delay implementation of the Durbin Interchange Amendment and a surge in campaign contributions.)

I think many people have the plague o' both your houses reaction of the unnamed Senate aide who compared the interchange fight to the MLB labor relations:  millionaires vs. billionaires.  I think that's unfortunate because I think there's a real consumer welfare issue involved.  (Sort of like the fate of the fans and the game of baseball.) For me the interchange issue boils down to a pretty simple question: who do you think is more likely to be able to squeeze consumers harder, banks or merchants?

Both groups are profit-motivated actors, not eleemosynary institutions. But both also operate in a world where competitive forces place limits on their pricing. My sense is that these forces place much stronger limits on merchants than banks (indeed, we limit entry into the banking space), so merchants are more likely to pass thru savings to consumers than banks. Moreover, merchants are likely to pass-thru savings to all consumers, whereas banks are likely to pass-thru savings regressively to high-net-worth consumers. To be sure, there are plenty of other interesting issues involved with interchange regulation, but I think this is the essential question--are banks on average more competitive than merchants?


I mostly agree with your conclusion, but have one quibble.
Merchants, like banks, price discriminate. However, banks price discrimination benefits wealthy folk. Merchants' price discrimination (a.k.a. "sales", "branding") benefits thrifty folk.

Both groups are profit-motivated actors, not eleemosynary institutions. But both also operate in a world where competitive forces place limits on their pricing.

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