Interchange Fees Impact on Consumers and Merchants Frank Maier-Rigaud, Senior Economist. OECD Competition Division,

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 $63 and the highest income households ($ 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 Coases 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