Debit Cards & Rent Seeking

The other day I received an "action alert" from my credit union telling me that congress was considering regulating interchange fees and that I should be concerned. Those are the fees retailers pay to the issuers of credit and debit cards, like my credit union. I should be concerned, they said, because those fees are what allow them to offer higher rates on deposits.

It was easy to dismiss this warning as too self-serving, but then I read this from Marginal Revolution and was reminded that just because something is self-serving that doesn't mean it is necessarily wrong:

There is a new paper by Todd Zywicki, which, due to my quick trip to Trento, I have not had time to read:

...Congress continues to deliberate...a set of new regulations for credit card companies. These proposals, offered in the name of consumer protection, seek to constrain the setting of “interchange fees” transaction charges integral to payment card systems—through a range of proposed political interventions. This article identifies both the theoretical and actual failings of such regulation. Payment cards are a secure, inexpensive, welfare-increasing payment mechanism largely unlike any other in history. 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. Merchants’ efforts to cabin these fees would harm not only consumers but also the merchants themselves as commerce would depend more heavily on less-efficient paperbased payment systems. The consequence of interchange fee legislation, as Australia’s experiment with such regulation demonstrates, would be reduced access to credit, higher interest rates for consumers, and the return of the much-loathed annual fee for credit cards. Interchange fee regulation threatens to constrain credit for consumers and small businesses as the American economy begins to convalesce from a serious “credit crunch,” and should be accordingly rejected.