Dartblog

I’m the chap holding up the one o’clock Subway sub line because I’ve asked the owner, a fierce Malay whose troupe of Spanish sandwich smiths are permitted nowhere near the register, why he doesn’t accept American Express—and then why he accepts what cards he does accept. It heuristically shows a lot about the owner’s margins and the elasticity he supposes of his customers.

That proprietors can elect which methods of payment to accept, and therefore which costs to incur, is a rather good deal for the consumer. There exist cash-people, who like to frequent small, low-margin local places which do not accept credit and charge cards. And there are credit mavens who sweat Secret Sauce and Delta miles.

But this system—to use the chic modern phrase, which lyingly supposes a master designer—came about naturally. As my friend Todd Zywicki writes in yesterday’s Journal, merchants are looking to use government to get themselves a better deal:

now the Merchants Payments Coalition—a group of retailers, supermarkets, drug stores, convenience stores, gas stations, on-line merchants and other businesses—wants Congress to intervene to rewrite their contracts. Several legislative proposals are on the table and while they differ in their details, they are identical in their intent—to artificially reduce interchange prices. [The price, measured in percentage points, that a merchant pays to the credit card issuer.]

What would happen if the Merchants Payments Coalition gets its way and politicians squeeze interchange fees? Credit cards are essentially a closed economic system: A reduction in interchange fees will have to be offset by increased revenues elsewhere or a reduction in costs. For example, issuers could try to increase the revenue generated from consumers through higher interest payments, higher penalty fees, or reinstating annual fees.

Card issuers might also reduce the quantity and quality of credit cards by restricting credit availability and cutting back on product innovation or ancillary card benefits. This is exactly what happened when Australian regulators imposed price controls on interchange fees in 2003: Annual fees increased an average of 22% on standard credit cards and annual fees for rewards cards increased by 47%-77%. Card issuers also reduced the generosity of their reward programs by 23%. Innovation, especially in terms of improved security and identity-theft protection, was stalled. Card issuers also increased their efforts to attract higher-risk customers who generate interest and penalty fees to offset lower interchange revenues from lower-risk transactional users.

The most important pro-consumer innovation in payment systems of the past two decades has been the general disappearance of annual fees on most credit cards. Cardholders now carry and use multiple cards at little or no cost. The consequences for consumer choice and competition have been profound—card issuers compete for consumer business literally every time they open their wallet to make a purchase.

No natural price system would brook this kind of systemic credit-line illiquidity just so that Subway can make an extra 0.25% on its sandwiches. (Just as no unjiggered system would have written as many Bb notes as banks did over the last ten years.) All it takes is the wild-eyed legislator’s nudge of an otherwise naturally arrived-at price to create immeasurable, unpredictable, genuine harm to ordinary people.