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Toward Reasonable Regulation of Debit Card Interchange Fees: The Case for Modifying the Federal Reserve Board’s December 16, 2010 Proposals (Litan R. E., Baily M. N.)

Payment systems

Abstract This paper shows why the Federal Reserve Board’s proposed alternatives for regulating interchange fees are not “reasonable” and therefore in direct violation of the statutory mandate that these rules be “reasonable” and “proportional” to the costs incurred by debit card issuers. The Board’s December 16, 2010 proposal is not “reasonable” because it would lead to a series of “unreasonable” outcomes, which, in significant part, flow from the predictable responses issuers of debit cards would take in response to the proposal. Policy makers cannot reasonably assume that banks in competitive markets will sit idly by while being forced to reduce their current market-determined debit card interchange fees, which comprise much of their debit-card revenues and a material portion of bank profits, by anywhere from 73 to 84 percent. To the contrary, banks will attempt to make up as much of the lost revenue as they can by some combination of higher fees on checking accounts, fees or reductions of benefits for debit card use, or more refusals by issuers to permit consumers to conduct higher-cost types of transactions that impose greater fraud risk. We argue that the Board should find that, in the absence of empirical evidence evaluated using the analytical framework governing two-sided markets proving otherwise, market-set interchange fees are reasonable and proportional to cost. Any other decision would lead to the unreasonable outcomes.
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Libref/ Litan R. E., Baily M. N. (2011) "Toward Reasonable Regulation of Debit Card Interchange Fees: The Case for Modifying the Federal Reserve Board’s December 16, 2010 Proposals", pp. 1 - 17
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