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Center for Regulatory Effectiveness Advises the Federal Reserve Board of an Effective Strategy for Implementing the Interchange Fee Provisions of Dodd-Frank
WASHINGTON, Oct.
25 /PRNewswire-USNewswire/ -- The Dodd-Frank financial reform
legislation requires the Federal Reserve to set interchange fees for
electronic debit card transactions. These fees are a subset of the
total costs paid by merchants for the business advantages accruing from
acceptance of debit cards. In
setting the interchange rate, the legislation instructs the Federal Reserve
to focus on the "the incremental cost incurred by an issuer…in the
authorization...of a particular electronic debit transaction...."
As a Federal Reserve Bank of Richmond publication explained, however,
"It is important to distinguish between incremental and marginal
costs." The FRB went on to explain that incremental cost is
greater than marginal cost and includes some fixed costs. Economists
in both government and academia have concluded that cost-based regulation of
interchange fees is a mistake. As a Congressional Research Service report
explained, "one should not expect either a cost based or zero
interchange fee to be optimal." Debit
cards are an example of a "two-sided market" which occurs in
industries which need to bring together two distinct groups of customers such
as merchants and consumers. Two-sided markets present special
challenges to regulators because they have two different supply and demand
curves, one for each side of the market. In
the attached paper, CRE recommends five principles to guide the Federal
Reserve in their regulatory deliberations to minimize the harm from the
statutorily-required but ill-advised regulation. These principles are: 1.
Price does not equal marginal cost in two-sided markets. 2.
To estimate marginal cost in a two sided market, the costs associated with
serving both sides of the market have to be tallied. 3.
Marginal costs for debit card processing include a probabilistic share of
lumpy costs that may be incurred when processing a particular
transaction. 4.
Marginal costs are a subset of incremental costs. 5.
Incremental costs include some fixed costs. Please
read "Understanding Marginal Costs in a Two-Sided Market:
Implications for Debit Card Interchange Regulation" at https://www.thecre.com/premium/wp-content/uploads/2010/10/Marginal-Costs-in-Two-Sided-Markets1.pdf The
Center for Regulatory Effectiveness is a regulatory watchdog group
located in Washington, DC which was founded
by former regulatory officials of the White House Office of Management
and Budget https://thecre.com/ombpapers/OMB_Officials.htm SOURCE
Center for Regulatory Effectiveness RELATED
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