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George Mason Professor Slams Interchange Regulation |
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In a new white paper, Todd Zywicki, a Geroge Mason University law professor and fellow at the International Center for Law and Economics, says attempts by Congress to regulate interchange fees are doomed to backfire, offering few benefits while increasing consumer costs and reducing credit availability.
Zywicki notes that while merchants have complained that interchange fees are excessive, the cost is far outweighed by the savings that result when card issuers assume the cost of credit risk on their behalf.
"Rather than increasing consumer welfare in any meaningful sense, interchange fee legislation represents an attempt by some merchants to shift costs away from their businesses and onto card issuing banks and cardholders. In particular, bank-issued credit cards offer a dramatic improvement in the efficiency and availability of consumer credit by shifting credit risk from merchants onto banks in exchange for the cost of the interchange fee—currently averaging less than 2% of purchase value," Zwicki argues.
The George Mason legal expert also notes that interchange regulation has been tried in Australia, with unpleasant results:
"These unintended consequences [from interchange regulation] include increased costs and fewer benefits for cardholders. This is precisely what happened in Australia—the most complete experiment to date with regulating interchange fees—when the central bank in that country artificially capped interchange fees. Credit card customers in Australia now pay more for their cards and receive less in return, and there is no evidence that consumers, including those using cash or other forms of payment, have benefited at all or that overall economic efficiency has improved," he noted.
Read the full paper here.
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