market value part 2

[quarrel]

Banks charge stores an average of 44¢ per credit card purchase to cover the costs of verifying the card and making the electronic transaction. The Senate just decided to let the Federal Reserve limit that charge to 12¢. I’m not sure what to think of this. My kneejerk reaction is that this move is unjustified unless there was some kind of price manipulation or oligarchy happening (and then would still be unjustified because other anti-shenanigans laws would presumably apply).

”How much is X worth?” is a very old and very hard question. Free Market fans will be quick to point out that if stores are willing to pay banks 44¢ per use for this service, then it’s worth that much by definition, though it’s always possible that stores came to that determination using poor logic or bad data, or falsified data feed them by those same banks. I haven’t seen any allegations that this is what happened, though. The support I have seen for this law goes something like this:

• This change will lower purchase prices for all consumers since stores will have lower costs to pass on.
• This change will shift the cost of the privilege and ease of using credit cards more heavily onto only those customers who actually use them. Right now, stores spread the cost of transaction fees over all customers. In the past, stores tried to add a credit surcharge only to credit purchases. This was reviled by shoppers, even when it was touted as a price break for using cash instead of a fee for using plastic. Under this new plan, banks that want to recoup lost revenue can’t get any more from stores and must look elsewhere, such as higher annual cardowner fees.
• This change will drop annual bank revenue by about $11.6 billion and recover some of the TARP bailout funds that should never have been given to banks in the first place, since they caused the meltdown. In this instance, it’s actually irrelevant whether the 44¢ cost is justified in and of itself.
• This change will encourage banks to stop delaying and finally do what Europe has already done: switch over to encrypted chipped cards (*), which are more secure and cheaper to operate.
• This change will address the issue that banks make too much money.

What’s actually going to happen? I don’t know. The last accurate political prediction I made was that China would address the Tiananmen Square protest with military force. I almost predicted that insurance companies would cancel some programs as a result of Obamacare, but it was more a realization that might happen than a firm expectation.

* EDIT: correction

Comments

[quarrel]

Add one more reason:

• This change halts the act of charging an unethically large markup.

There’s a widespread belief that it’s simply immoral to charge a whole lot more for a good or service than it cost you to make or do in the first place. The Fed’s figure of 12¢ is based on the answers to a survey they submitted to several large banks that issued debit cards.That survey showed a median debit card transaction cost of 7¢. That counts only authorization (making sure the transaction is allowed), clearing (making it happen), and settlement (making sure it happened correctly), not overhead costs or even a fraction of what it costs to maintain physical data lines, so some people say it’s inaccurately low. Other people complain that this average is untrustworthy because this was a survey, not a study, so each bank had to interpret and fill out information on its own. Making matters murkier, the federal agency that regulates credit unions did a separate study and found that the median debit transaction cost for large credit unions is only 2¢, though they admit that even they have a hard time believing that figure and that smaller unions pay more.

All that aside, I haven’t ruled out the possibility that 44¢ is a considerable markup. The Fed survey median is less than a sixth the current mean. But I haven’t come up with any objective measure of how much is “too much”, either, so it’s a wash.

As to why the invisible hand of competition doesn’t drive these costs to an efficient minimum automatically: that’s easy. Banks do not charge stores these fees. Credit/debit card companies charge stores these fees. Then banks charge credit card companies. So the CC companies are not merely competing to see who can offer the lowest prices to stores. They’re also competing to see who can offer the highest payments to banks, to entice those banks to issue their company’s cards instead of someone else’s. So they can’t get into undercutting wars.

I’m reasonably sure it will become more expensive to get a credit or debit card after this. A more precise prediction I can’t give.