Competing Payment Systems: key Competing Payment Systems: key insights from the academic literature insights from the academic literature Payments System Review Conference Payments System Review Conference Reserve Bank of Australia and Centre for Reserve Bank of Australia and Centre for Business and Public Policy, MBS Business and Public Policy, MBS Sydney, 29 November 2007 Sydney, 29 November 2007 Jean- -Charles Rochet Charles Rochet Jean Toulouse School of Economics and IDEI, France Toulouse School of Economics and IDEI, France 1 1
I. INTRODUCTION In relation with the fantastic development of card payments all over over In relation with the fantastic development of card payments all the world, Interchange Fees (IFs IFs) are everywhere under scrutiny : ) are everywhere under scrutiny : the world, Interchange Fees ( � Retailers associations lobby for � Retailers associations lobby for IFs IFs prohibition (Euro prohibition (Euro- -Commerce) Commerce) or engage in private law suits (Wal- -Mart and other class actions, Mart and other class actions,… …) ) or engage in private law suits (Wal � Public Authorities push toward reduction in � Public Authorities push toward reduction in IFs IFs (OFT, (OFT, European Commission, also in Colombia, Israel, Mexico, European Commission, also in Colombia, Israel, Mexico, Portugal,… …) or even regulate them (RBA) ) or even regulate them (RBA) Portugal, � Australia is at the forefront: regulation + careful review proce � Australia is at the forefront: regulation + careful review process ss This presentation summarizes conflicting doctrines and compares them them This presentation summarizes conflicting doctrines and compares with empirical findings (facts) and economic analysis (theory). with empirical findings (facts) and economic analysis (theory). 2 2
OUTLINE OF PRESENTATION OUTLINE OF PRESENTATION CONFLICTING VIEWS BY SYSTEMS, II. DOCTRINES: CONFLICTING VIEWS BY SYSTEMS, II. DOCTRINES: MERCHANTS, AND PUBLIC AUTHORITIES. MERCHANTS, AND PUBLIC AUTHORITIES. EMPIRICAL EVIDENCE ON THE IMPACT OF III. FACTS: EMPIRICAL EVIDENCE ON THE IMPACT OF III. FACTS: IFs MOVEMENTS. IFs MOVEMENTS. IV. ECONOMIC ANALYSIS. ECONOMIC ANALYSIS. IV. V. POLICY RECOMMENDATIONS. POLICY RECOMMENDATIONS. V. 3 3
II. DOCTRINES: CARD SYSTEMS, MERCHANTS II. DOCTRINES: CARD SYSTEMS, MERCHANTS AND PUBLIC AUTHORITIES AND PUBLIC AUTHORITIES : 1. The card card systems systems viewpoint viewpoint : 1. The Open Open card card systems systems are joint are joint ventures ventures: : each each card card payment payment necessitates the collaboration of the collaboration of two two banks banks ( (issuer issuer and and acquirer acquirer). ). necessitates These banks banks will will cooperate cooperate only only if if they they get get a a fair fair share share of of the the These economic value value created created by by the the system system. . economic « Interchange Interchange is is an essential an essential mechanism mechanism for for balancing balancing the the costs costs « and the revenues of the issuing issuing and and acquiring acquiring sides sides of the of the and the revenues of the payment network network» » (Guide to Visa (Guide to Visa Australia Australia, , Fact Fact Sheet Sheet 10) 10) payment 4 4
II. DOCTRINES 2: MERCHANTS II. DOCTRINES 2: MERCHANTS � � “IFs IFs are just a way to put the burden on us. We are obliged to are just a way to put the burden on us. We are obliged to “ accept the cards that consumers want to use. This is exploited by y accept the cards that consumers want to use. This is exploited b networks who tax us and (partially) subsidize cardholders” ” networks who tax us and (partially) subsidize cardholders � � “The only sensible thing to do is to mandate a zero IF( at par The only sensible thing to do is to mandate a zero IF( at par “ regulation)” ” “ “Each side should pay its own costs Each side should pay its own costs” ” regulation) 5 5
II. DOCTRINES 3: COMPETITION AUTHORITIES II. DOCTRINES 3: COMPETITION AUTHORITIES � � “Card issuers incur some costs (authorizing and processing Card issuers incur some costs (authorizing and processing “ transactions, consumers defaults,… …) that benefit retailers. IF is a fee ) that benefit retailers. IF is a fee transactions, consumers defaults, for service that compensates for these costs” ”. . for service that compensates for these costs � � “Banks can increase their profits by artificially inflating these Banks can increase their profits by artificially inflating these “ costs and redistributing the proceeds between them. Therefore IFs IFs costs and redistributing the proceeds between them. Therefore should be regulated: cap based on the admissible costs of issuers s” ”. . should be regulated: cap based on the admissible costs of issuer 6 6
II. DOCTRINES 4: RBA II. DOCTRINES 4: RBA � � “Debit card payments are socially more efficient than credit “ Debit card payments are socially more efficient than credit card payments but consumers (used to) get the wrong price signals: s: card payments but consumers (used to) get the wrong price signal they (used to) pay fees for debit cards and receive rewards for credit credit they (used to) pay fees for debit cards and receive rewards for card payments (which are more costly than debit card payments). card payments (which are more costly than debit card payments). This is because IFs IFs are not the result of a competitive process are not the result of a competitive process” ”. . This is because � � “Regulation of Regulation of IFs IFs was intended to eliminate this distortion: if was intended to eliminate this distortion: if “ card schemes are forced to set IFs IFs that are based on issuers costs, that are based on issuers costs, card schemes are forced to set then issuers will not have an interest in promoting the less efficient icient then issuers will not have an interest in promoting the less eff payment instrument (credit)” ”. . payment instrument (credit) Each of these doctrines contains some element of truth but none of of Each of these doctrines contains some element of truth but none them captures the whole story. them captures the whole story. 7 7
III. FACTS(1) FACTS(1) III. IFs have an (asymmetric) impact on (net) user fees: have an (asymmetric) impact on (net) user fees: IFs RBA reform: reduction of average (credit) IFs IFs from 0.95% from 0.95% RBA reform: reduction of average (credit) (2003) to 0.55% (2006). (2003) to 0.55% (2006). Merchant fees (in open schemes) fell from 1.4% to 1%. Merchant fees (in open schemes) fell from 1.4% to 1%. Cardholder rewards only fell from 0.81% to 0.63%. Cardholder rewards only fell from 0.81% to 0.63%. Consistent with studies in other countries. Consistent with studies in other countries. Implies that issuers are not perfectly competitive Implies that issuers are not perfectly competitive They charge margins over marginal costs in order to They charge margins over marginal costs in order to recoup large fixed costs (RBA cost study: average annual recoup large fixed costs (RBA cost study: average annual cost of a credit card account: $109) cost of a credit card account: $109) 8 8
III. FACTS (2) FACTS (2) III. Costs savings of retailers have not been passed through to Costs savings of retailers have not been passed through to : consumers : consumers no observable reduction in retail prices no observable reduction in retail prices Similarly retailers are reluctant to surcharge : Similarly retailers are reluctant to surcharge : only 15% of very large merchants, less than 6% of small merchants s only 15% of very large merchants, less than 6% of small merchant IFs (average surcharge on open (average surcharge on open Surcharges are often higher than IFs Surcharges are often higher than schemes cards=1%, compared with average IF= 0.50%) schemes cards=1%, compared with average IF= 0.50%) Confirms what has been found in other countries and suggests that t Confirms what has been found in other countries and suggests tha retailers are not perfectly competitive either. retailers are not perfectly competitive either. 9 9
III. FACTS (3) FACTS (3) III. Consumers react to increases in their card fees: Consumers react to increases in their card fees: Recent empirical studies based on US individual data Recent empirical studies based on US individual data Zinman (2007): (2007): “ “pecuniary cost minimization accounts for more than pecuniary cost minimization accounts for more than Zinman 38% of cross- -sectional debit use over the period 1995 sectional debit use over the period 1995- -2004 (50% in 2004 (50% in 38% of cross 2004). 2004). confirmed by Ching Ching and Hayashi (2007). and Hayashi (2007). confirmed by “Two sidedness Two sidedness” ” of payment industry cannot be neglected (price of payment industry cannot be neglected (price “ structure matters). structure matters). However these effects are difficult to detect on aggregate data these effects are difficult to detect on aggregate data : : However debit cards are often bundled with current account services, debit cards are often bundled with current account services, transaction fees are often zero, transaction fees are often zero, rewards are difficult to measure. rewards are difficult to measure. 10 10
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