Albert Foer, President of the American Antitrust Institute, thinks the U.S. government should impose a limit of 0.5% on the fees charged by banks to retailers for use of credit cards. Currently Visa and Mastercard charge about 2% of all transactions.
Is this a good idea?
Interestingly, it seems Visa grew its market share buy raising their fee, which gave banks an incentive to push Visa on retailers and offer nice deals to consumers who used the card in the form of cash back bonuses, frequent flyer miles, etc.
This does seem like a strange market. Clearly there are market power issues stemming from network externalities and economies of scale.
When Australia capped the fee is didn't seem to cause many problems, or so Foer claims. Is that true? It seems like a simple enough thing to examine empirically. What share of retail sales in Australia are credit card transactions? How does this compare to the U.S.? How did shares change in both countries before and after the change in Australia's policy? It might also be interesting to see how retail prices and the share of credit card transactions changed in the U.S. as the credit card companies upped their fees.
I'm not sure if regulation makes sense or not, or if it does make sense whether it would optimally take the form Foer is suggesting. But it sure seems like an interesting thing to study. While I know of some work (e.g. Ausubel) that focuses on consumer behavior and high interest rates, the issue here may be a larger one. Two percent of ALL transactions is a lot of money!