Dramatic Credit Card System Reform: What Happened?
Joshua Gans Melbourne Business School (March 2006)
Reforms
1st January, 2003: surcharging permitted 31st October, 2003: capped interchange fee based on issuer costs (approximately 50% reduction) 23rd February, 2004: opened up access to credit card schemes
Theory of Reform
Gans-King (ER, 2003):
If permit surcharging, then interchange fee (a) reform unnecessary (neutrality hypothesis) Will see surcharging by monopolists in excess of merchant service charges
If a non-neutral and want to minimise transaction costs (not consumer welfare), then set a to send price signals to consumers and merchants. Try to achieve abc = (1-a)bm (a: consumer share of benefits) Cost imposed by consumers on merchants (cA – bm). So set a = bm – cA to compensate. This gives: a* = a cI – (1-a) cA If a = 1 and cA = 0, then RBA standard of cI is ‘approximately’ optimal. Previous standards were excessive.
Gans-King (RNE, 2003):
Merchant Service and Interchange Fees
3.00 2.50 2.00
%
MC/ & Visa Am Ex Diners Interchange Fee
1.50 1.00 0.50 0.00
ar -0 3 Ju n0 Se 3 p0 De 3 c0 M 3 ar -0 4 Ju n0 Se 4 p0 De 4 c0 M 4 ar -0 5 Ju n0 Se 5 p0 De 5 c05
M
10000
11000
12000
13000
5000
6000
7000
8000
9000
May-94 May-95 May-96 May-97 May-98 May-99 May-00 May-01 May-02 May-03 May-04 May-05
Number of Credit Card Accounts
Value of Credit Card Purchases ($m)
16000 14000 12000 10000 8000 6000 4000 2000 0
May-94 May-95 May-96 May-97 May-98 May-99 May-00 May-01 May-02 May-03 May-04 May-05
14000
Aug-02 Oct-02 Dec-02 Feb-03 Apr-03 Jun-03 Aug-03 Oct-03 Dec-03 Feb-04 Apr-04 Jun-04 Aug-04 Oct-04 Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Oct-05 Dec-05
16000
18000
20000
22000
24000
26000
Credit Card Debt ($m)
100%
40% Debit Credit
50%
60%
70%
80%
90%
Shares of Credit & Debit
Au g02 No v-0 Fe 2 b0 Ma 3 y -0 Au 3 g0 No 3 v-0 Fe 3 b0 Ma 4 y -0 Au 4 g04 No v-0 Fe 4 b05 Ma y -0 Au 5 g05 No v-0 5
100.0
70.0
Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05
75.0
80.0
85.0
90.0
95.0
Shares of Credit and Charge (Value)
M/C & Visa
AmEx & Diners
Dramatic Changes but …
No apparent change in credit card usage (numbers, value) Continued credit card debt Constant relative use of credit and debit Small shift towards charge cards Few instances of surcharging
Did someone say ‘neutrality’?
Gans-King hypothesis: sufficient retail competition to make interchange fees neutral Acquirer margin is unchanged (about .4%): complete pass through (a condition for neutrality) Lerner ((m-a)/m) index has grown (cA = 0)
Sept 2003: 0.32 = (1.4 – 0.95)/1.4 Dec 2005: 0.42 = (0.96 – 0.55)/0.96
Acquiring welfare distortion has increased!
Not competition but consumers
Credit card reform was not a competition policy issue. Competition instruments are ineffective. If concerned that consumers are either:
Choosing expensive forms of payment Incurring too much credit card debt
Issue for consumer protection policy Implication: give payment systems policy to the ACCC