Legal Commentary

Interchange Price Controls and the Central Planning Mentality:

By Todd Zywicki

A few final thoughts on the Durbin Amendment and interchange price controls.

First, one of the peculiarities of the price control provisions of the Durbin Amendment is that it only applies to debit and prepaid cards.  This seems peculiar because for years the primary concern of merchants has been credit cards, which have higher interchange fees than debit cards.  So why does the Durbin Amendment exclude credit cards?

The answer tells you little about sound economic policy?but much about the mentality of economic central planning.  The price controls apply to debit not because they are more needed there, but because it is easier for a central planner to calculate the ?actual cost? of a debit transaction than a credit transaction.  The problem with credit is that there is an obvious credit risk embedded in a credit transaction that there is not in a debit or prepaid card, so the central planning calculation is more difficult.

So the logic of the Durbin Amendment?seriously?is to impose price controls on debit and not credit because it is easier to calculate the right cost.  So the regulators start with the question of which presents the easier central planning challenge and then work backwards from there, rather than which arguably presents the greatest economic need.  Amazing.

Second, the great irony of this is that once price controls are imposed on debit cards, they will become a money-loser for banks and become more expensive for consumers relative to credit cards.  The predictable effect will be to provide incentives for issuers and consumers to shift away from using debit cards to greater use of credit cards instead.  And since credit cards have a higher interchange fee than debit cards, this will mean that merchants will be processing more transactions at that higher rate than before.  How?s that for an unintended consequence?

This will mean inevitably that soon after debit price controls go into effect merchants and politicians will start complaining about the increased use of credit cards by consumers.  And the whole lobbying enterprise will begin anew.  Senator Durbin may not know anything about economics but he certainly knows politics.

Full post as published by The Volokh Conspiracy on June 21, 2010 (boomark / email).