Stopping the Spread of Bad Ideas

Bad ideas can spread across borders just like contagious diseases, with the similarly unwelcome consequences.

One bad idea spreading across international borders is regulating the prices businesses pay each other to process electronic payments.

Payment cards are processed in what are referred to as "interchanges," which connect retail merchants' cash registers with their bank and their customers' banks in the blink of an eye. The interchange is a technological marvel that benefits everyone who uses it.

The problem arises when politicians intervene to regulate the interchange rates that retail merchants pay. Regulating payment card fees has political appeal to elected officials who are told by retailers who claim to be speaking on behalf of consumers. These merchants tell the political class that if they pay lower, regulated interchange rates, they will pass those savings on to consumers.

In country after country, the reality is quite different. Sure enough, retail merchants benefit from the lower fees. But those benefits are passed on to the retail merchants' shareholders, not to consumers as promised. Consumers end up paying higher fees -- either through "checkout fees" (surcharges at the register) or higher banking fees.

Our first good look at interchange regulation was in Australia in 2003, when the Reserve Bank of Australia (RBA) implemented regulation reducing interchange rates by 50 percent and eliminating rules forbidding retail merchants form charging fees at the checkout counter for customers who used payment cards.

The Australian government claimed that savings resulting from forcibly lowering interchange rates would be passed on to Australian consumers in the form of lower retail prices, but the opposite happened. Not only did fees for cardholders increase, but they also got new surcharge fees at the register. The "checkout fees" charged by retail merchants got so high that the Australian government stepped in once again to regulate retailers through surcharge legislation.

So, Australian consumers were left worse off, and Australian economy ended up with new regulations on card companies, banks, and retail merchants. Regulations only led to more regulations, and none of the promised benefits to consumers were delivered.

Like all price-fixing schemes, this one ended badly. The Australian government grew, Australia's free economy ended up with new regulations in not one but two sectors, And consumers were worse off.

But did this lesson inoculate other countries from "interchange fever?" Unfortunately not.
The price-fixing fever was passed into the United States when Senator Dick Durbin (D-IL) successfully passed the eponymous Durbin Amendment as part of the massive Dodd-Frank financial regulatory act. The Durbin Amendment led the Federal Reserve to cap interchange fees at 21 cents (a decrease of over 50 percent). The result? U.S. consumers have lost free-checking accounts they once enjoyed, and are now feeling hikes in other bank-fees since Senator Durbin falsely promised them benefits. Small businesses and communities have also suffered as local credit unions and community banks, unable to compete under new market equilibriums, have lost needed revenue, and some have failed.

Interchange regulation fever has now breeched the borders of Australia and the US into the European Union.

The EU has recently introduced legislation which would regulate interchange, and predictably harm consumers the same way Australian and American consumers have been harmed. Despite cries of warning from past situations, the fever continues to spread. Several consumer groups and card companies have spoken out against enacting such regulation, telling tales of the consumer harm done to their neighbors overseas, hoping regulators have not become so delirious that they can no longer see clearly what has happened in other countries, or listen to reason.

Here's to hoping that this interchange influenza is contained, before EU consumers suffer the same fate as their Australian and American neighbors.