The New York Times has an eye-opening article today about the duopolostic market power exercised by Visa and MasterCard over commercial vendors:
A typical merchant card payment has two parts: an “interchange fee,” which includes an average 1.7 percent of the sale price and a flat per-transaction fee, and a separate fee that goes to the merchant’s bank. Take, for example, a driver who pays for a $1,000 car repair with a credit card. The bank that issued the consumer’s card receives an interchange fee of $17.10 (including a 10-cent flat fee), while the repair shop’s bank gets $4, or four-tenths of 1 percent of the total sale. The repair shop pockets $978.90.
In 2007, merchants paid $61.56 billion in electronic payment fees, up from $48.58 billion in 2005…
Various factors make every interchange fee unique. If the magnetic strip on the consumer’s card does not work and a cashier has to enter its number manually, for example, a higher charge results. If the card “rewards” the consumer with cash back or airline miles, that, too, has a higher charge.
Beyond setting fee schedules, card agreements also reach into merchants’ daily operations. Merchants who take cards are supposed to accept them for purchases of any size. But to protect profits from customers who use plastic for everything — a recent Visa television advertisement campaign humorously suggested that only social malcontents pay with cash — some small merchants break the rule and set minimum amounts for card purchases…
“Merchants derive significant gain from the electronic payments system, which has evolved new features such as rewards programs,” said Trish Wexler, spokeswoman for the Electronic Payments Coalition, an advocacy group in Washington. “Ultimately, merchants benefit from rewards programs because people buy more when they use cards. Higher fees for rewards cards are justified because merchants and consumers both share in their expense — but merchants want to pass their fair share to consumers, who’d be hit with higher credit costs and reduced rewards if the merchants succeed.”
There needs to be a serious discussion among economists and policymakers about nationalizing the credit card industry. Credit cards and debit cards are far more efficient than cash, and we would all be better off if more, if not all, transactions were mediated through electronic payment. When credit-card companies extract monopoly rents, that eats into the social surplus procured by credit-card technology. The proposition of the government issuing credit cards might strike some as socialism, but one should see an analogy between this circumstance and the period in history when banks, rather than governments, printed currency. The economies of scale in currency (both physical and electronic) tend toward monopoly–that’s unavoidable. Most people would agree that having the government print paper money is a good policy; they should contemplate whether the same should be done with electronic payment.
