GMU rejects credit cards because of high interchange; more interchange; net redistribution upwards.

Heh. Great catch by credit slips. George Mason University, whose Mercatus Center hosted the recent panel about interchange I was on as well as the research of Todd Zywicki about interchange, research that found that “Merchants’ efforts to cabin these [interchange] fees would harm not only consumers but also the merchants themselves”, is no longer accepting Visa cards for tuition because the interchange is too high.

To repeat, George Mason University is no longer accepting Visa cards for tuition because the interchange is too high.

If ever there called for radical campus activism from the right at GMU, this is it. I like the idea of libertarians at GMU, egged on by their professors, chaining themselves to administrative offices, refusing to leave the premises until the administration acknowledges that in a perfect world with a perfect market in a closed loop with networks properties economic theory tells us it can’t matter to anyone what the interchange rate is, so the administration must accept Visa’s demands no matter what it is cause the rate doesn’t even matter. Students would disrupt administration meetings by standing up and reading Ronald Coase’s The Problem of Social Cost. Someone would give a passionate speech, Mario Savio style, that sometimes you have to pour 2%+ and rising of the dollar amount of all purchases upon the gears and upon the wheels, upon the levers, upon all the apparatus of our payment system, and you’ve got to make sure merchants have no power to price discriminate.

Seriously though, GMU is lucky to be in a privileged position to opt-out, thus giving them some negotiating power over their fees. For most businesses, having to take credit cards as the 21st century payment is just how the economy works.

A little bit more.

For those who want more arguments on interchange, this back and forth in comments between Todd and Adam Levitin is very good. Adam:

This spring, Visa’s Interlink debit network raised fees by 18-40% (depending on merchant category) and made it more difficult to get into the lower fee categories. No loss of market share. And no increase in rewards programs as a result. That sure looks like economic rents earned by the issuers to me.

There’s also a recent example from the credit card market. While credit card interchange has remained stable (on a weighted average basis) for the last couple of years, the total cost for merchants has risen because there’s another pig at the trough since MasterCard and Visa’s IPOs. The networks are now being run on a for-profit, rather than mutual basis, and the shareholders want to be fed. So network assessments have increased on MasterCard and Visa, but not on Discover and Amex. Again, a small, but significant increase in price without any loss in market share for MasterCard and Visa. Raising fees to feed another mouth via dividends to shareholders is pure extraction of economic rents by the networks….

But we know that’s not the real world. Issuers do not pass thru anywhere close to 100% interchange above processing costs because the card issuance market is not price competitive. Card issuers compete on things like image, rewards, and salient price points, not total price. While networks compete for issuers, that simply does not translate into consumer benefit. Because of imperfect competition in the issuing market, issuers are able to retain most of the interchange fees they levy. Those are economic rents.

Your concern is that if interchange fees are regulated, merchants will effectively become the rent receivers, and these rents won’t be dissipated via lower prices to consumers. No doubt, merchants will not always pass thru all the savings to consumers; the pass-thru depends on how competitive their particular industries are. But merchants are, in general, much more price competitive than card issuers, so there is likely to be much greater rent dissipation via merchants competition for consumers than via card issuer competition for consumers….

There is still the problem of fees being shifted from one type to another. But because certain types of fees (e.g. annual fees) are more salient to consumers than others (e.g., interchange fees), it isn’t possible for card issuers to do a dollar-for-dollar shift in fees. Forcing fees toward transparent, salient points enhances competition and pushes down total fee levels. Our goal should be a card market with as close as possible to perfect competition and maximum consumer choice. Unfortunately, this isn’t a market in which a pure laissez-faire approach will achieve that.

Note the first paragraph. This is what I hear from merchants all the time – they’ve been jacking the fees recently, and there’s been no decline in market share whatsoever. This is why, as Ryan Grim and Laura Bassett report, merchants have been collecting signatures, trying to educate, and getting political – they feel powerless to negotiate these fees in any productive manner.

Estimating Cross-Subsidization

Some additional stuff: Here’s a neat study by Efraim Berkovich of University of Pennsylvania, sponsored by the Hispanic Institute, Trickle-Up Wealth Transfer: Cross-subsidization of consumers in the payment card market. Look at the income distribution and millions of dollars in transfers estimated in this graph:

They “gathered telephone survey data on payment method usage from a cross-section of consumers in the U.S. stratified by income. We specifically asked about spending on gasoline and groceries. Other questions asked about card rewards and annual fees”, and then estimate out the transfers. I haven’t gone through this paper for the full methods yet, but even if this is a ballpark estimate (and I believe it is), it’s shocking. What I find the most interesting is that it goes from positive to negative much higher than the median person. The 60th income decile might be net redistributing upwards from their cards. That’s much higher in the curve than I would have expected, which is shocking even to me.

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9 Responses to GMU rejects credit cards because of high interchange; more interchange; net redistribution upwards.

  1. azmyth says:

    Eventually merchants will have to start offering discounts for using cash to offset the charge. Ultimately, prices should adjust.

    • David says:

      Nice sentiment, but when I was in business I was told that this practice, or at least advertising it, was illegal.
      True or not, had I instituted this policy I would not have been allowed to accept credit cards. For big-ticket items this would have been death.
      They have us by the short curlies.

  2. Ned Baker says:

    In my ideal world my merchant would just transparently pass on the fee to me, so I can decide if using a particular card is still worth it. But I never see this. Is it prohibited in their contracts with the card issuers?

  3. Ned Baker says:


    Merchants and customers will keep getting screwed as long as goods cost the same in both cash and credit.

  4. Regarding Coase, the approach he’s known for is right for some things, for some cases, but hardly for all.

    Here’s a fantastic quote from leading growth economist Paul Romer of Stanford:

    As just one example, recall that the increasing returns to scale that is implied by nonrivalry leads to the failure of Adam Smith’s famous invisible hand result. The institutions of complete property rights and perfect competition that work so well in a world consisting solely of rival goods no longer deliver the optimal allocation of resources in a world containing ideas.

    — Forthcoming American Economic Journal paper, page 8, at:

    Click to access Kaldor.pdf

  5. Robert Simmons says:

    I don’t support a campaign to force down the price of Porsches. I don’t own a Porsche because the price is too high. Therefore, I am a hypocrit. At least, that’s how I read your take on GMU. What am I missing?

  6. Pingback: Debit card fees: Why the big banks want you to blame Washington, not them. – By Annie Lowrey – Slate Magazine | Slinking Toward Retirement

  7. Pingback: Richard (RJ) Eskow: The Card Sharps: The Fight Over Wall Street's 'Invisible Tax'

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