Interchange Fees a Scam?

Kevin Drum looks at credit card interchange fees, which result in very slightly higher prices to the poor, and big cash rewards to the wealthy, and pronounces them, "The Great Credit-Card Interchange Fee Scam".  But as Matthew Yglesias points out, it's nothing of the sort.  What it is is a net transfer to the affluent from the merchants, with an unfortunate side-effect of disadvantaging those who use cash.

I never understood why the progressive consumer finance types got so worked up about interchange fees, which are essentially a knock-down fight betweBlog_Interchange_Fees.jpegen two very powerful business lobbies, not a cosmic injustice perpetrated against the American consumer.

Moreover, progressives took the side of a lobby--retailers--that every other day of the week is being excoriated for its excessive accumulation of market power.  This made complaints that they were putty in the hands of Visa and Mastercard a little hard to take.

Merchants would like to pay lower fees, a cause to which I am of course sympathetic, but not one that actually motivates me to undertake a teary-eyed march upon 1600 Pennsylvania Avenue to demand that the government do something.  When I moderated a panel on interchange fees in June, Felix Salmon was frustrated by the fact that we didn't spend more time on his concerns about things like Visa's market power, and I was frustrated that I couldn't get any of the advocates of interchange regulation to specify any benefits beyond richer merchants, or explain to my satisfaction why the rest of us should want to intervene on the behalf of an enormously powerful lobby.

To be sure, the current system benefits the wealthy most.  But that is broadly true of many business models; shall we outlaw Costco because the poor cannot afford lavish pantries and large chest freezers in which to store their warehouse-club bounty?

If you are worried that the poor are making a (very small) transfer to the wealthy--and this seems like a fair complaint--this is easily rectified with a (very small) boost in the EITC or standard deduction that will put $25 back in the pockets of the needy.  Hell, bring it up to $64 so that they can simulate the bounty that interchange fees have bestowed on the upper-middle class.

But justifying a drive to transfer large amounts of money from banks to merchants, on the grounds that this will offer some trivial benefit to the poor, is a bit of transparent puffery from the retail lobby.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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