Yglesias and McArdle Miss on Interchange Fees

Matt Yglesias is defending the interchange industry, which transfers money from the poor to the rich—all through hidden fees.

Once you keep in mind the fact that the median household income in 2008 was slightly above $52,000 it’s not at all obvious to me that this is any kind of scam. Instead, it appears to be a classic positive sum business interaction. Credit card companies use interchange fees to cut into retailers’ monopoly rents and then rebate a share of the fee to consumers via reward programs, and on net consumers benefit and the median household appears to benefit.

Well, wait a second. Retailing is one of the most competitive industries in the country. Meanwhile, the interchange industry is one of the least competitive. MasterCard and Visa are the duopoly here, not Wal-Mart and Target (though I think the market powers of the latter are too concentrated. That’s for another post).

Visa and MasterCard control 96 percent of the debit- and credit-card market worldwide (79 percent in the U.S.).

They have monopoly profit margins, too. Both are in the mid-30 percent range on a net basis, which is astonishing for any business (Here’s a list of industries by profit margin—note how far down on the list retailers are).

Visa and MasterCard have abused their monopoly status, too, multiple times, and have had to fork over $8.5 billion last decade for their actions.

This is not a healthy market and it’s not good for consumers. Retailers pass on as much of these costs as they can to them.

Megan McArdle doesn’t agree with that market logic:

What it is is a net transfer to the affluent from the merchants, with an unfortunate side-effect of disadvantaging those who use cash.

But how does it disadvantage those who use cash? Because they have to pay higher prices charged by retailers to cover their interchange costs.

McArdle trots out the straw man here:

Moreover, progressives took the side of a lobby—retailers—that every other day of the week is being excoriated for its excessive accumulation of market power. This made complaints that they were putty in the hands of Visa and Mastercard a little hard to take

That’s ridiculous. Isn’t that also the side of consumers? I guess the U.S. took the side of Stalin in World War II. But Uncle Joe happened to be on the right side.

Yglesias says “it strikes me as primarily the sort of business versus business dispute that we should stay out of.” But don’t you think it might be a bad idea to have two companies with overtly anti-competitive histories dominate a market critical to the economy?

As I said in January, “How screwed up does an industry have to be for competition to increase prices?” That’s what’s gone on here, and it’s a market failure. Time to reread this New York Times story on that.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.