Friday, May 12, 2017

Credit Card Fees: Who's Really Rigging the Market?

“New Jersey has a unique chance to strike a blow for consumers, free markets and even to boost its economy. Will the state take it?”

That’s how John Holub, president of the New Jersey Retail Merchant Association, started his guest column, Let’s reduce credit card swipe fees, published last June in the New Jersey Star-Ledger. But a free market entails government neutrality, in which force is banished, all transactions are strictly voluntary, and government simply bans force and fraud but otherwise protects every individual’s rights equally and at all times. A government that passed laws favoring one economic interest, such as consumers or merchants, at the expense of other economic interests, in this case the credit card companies, is not protecting a free market. It is initiating force, violating the most basic principle of a free market—the absence of aggressive, or initiatory, physical force.

What does Holub demand that lawmakers legislate?

Every time you swipe a card to pay for something, the bank that issued the card charges the merchant a fee to process the transaction. The problem is that MasterCard and Visa control a dominating 80 percent of the market, enough control to price-fix these fees at exorbitant levels with little competition.

Now a bipartisan group of legislators wants to fix this rigged market. Their bills (A752 and S1924) would throw open the market to competition by permitting merchants to pick which network they will use to process their credit card transactions.

Right now, if a customer whips out a Visa card at a restaurant or gas station, the merchant must use Visa's network to process the transaction. But with merchants free to use any number of networks at their discretion, the networks will have to compete and fees will fall.

So Visa and MasterCard setting terms and prices for their own product by voluntary agreement with merchants is “price fixing.” But the NJRMA seeking legislative favors forcing their terms on  Visa and MasterCard is not. Sounds like Newspeak. George Orwell must be chuckling, “I told you so.” Visa and MasterCard have a right to set the condition that only they can process sales transacted with their cards. Holub’s answer to that is that Visa and MasterCard are monopolistic, and cites AT&T as an analogy:

We know it will work because we've seen lots of evidence. Consider AT&T, where long-distance calls were hugely expensive until in the 1980s. The government required that consumers have a choice of carriers. Rates plummeted from dollars a minute to mere cents.

The analogy to AT&T is ridiculous. AT&T was a government-enforced monopoly. Competition was legally forbidden until Congress acted. That is not the case with credit cards. Visa and MasterCard are not monopolistic in any way. They are open to competition. Their 80% market share is earned by the voluntary choices of merchants and consumers. The merchants benefit by accepting Visa and MasterCard. Otherwise, why accept them? But they want to have their cake and eat it, too. They want the benefits of the business Visa and MasterCard bring them, without having to abide by voluntary contract with them.

Holub also cites the example of debit cards: “Congress reformed the way Visa and MasterCard dominate that market by requiring the banks' costs be reasonable compared with their profits.” But two wrongs don’t make a right. Price controls are immoral and contrary to the principles of a free market.

Visa and MasterCard have a great product that fosters commerce and they are profiting handsomely from it. But remember that the credit card business is highly competitive. I get solicitations all the time, with banks falling all over themselves to offer  better “cashback” or “rewards” incentives to use their cards.

Visa and MasterCard can not “rig the market.” They can only set terms relating to their own product, which merchants are free to accept, attempt to negotiate terms more to their liking, or forego doing business with Visa and MasterCard. Only government, with its law-making power of the gun, can rig. That’s what the merchants are after. Granted, Visa and MasterCard undoubtedly have their own lobbyists sometimes seeking to get legislation that favors them. That’s wrong, too—although most lobbying is likely designed to fight against legislation that hurts them. And in this case, the banks are playing defense.

Holub has no business waving the free market banner. What he advocates is the exact opposite of free market economics. It’s pure cronyism for the NJRMA to try to get lawmakers to rig the contract terms in their favor.

NOTE: As of this time, the bills Holub supports, A752 and S1924, have not been enacted by the New Jersey legislature.

Related Reading:

Wolves, Vultures, Consumers - and New Debit Card Regulations

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