Thursday, December 17, 2009

Card Fees only Scrooge could love

San Diego Union-Tribune commentary "Card Fees only Scrooge could love" (December 17th, 2009) offers an ill-reasoned animadversion of credit card company fees.

Because the major credit card brands insist on collecting something on every transaction made on every credit and debit card, so-called “swipe fees” are hidden in the purchase price of all of a retailer’s products. In other words, everyone pays more to cover these fees every time they buy something. This is true even for low-income people who are unranked and must pay with cash. The result is a huge wealth transfer from poor to rich.

In fairness to the Union-Tribune, the economics Ph.D. consulted and cited in the article apparently did not give consideration to the idea that credit card technology could improve the total factor productivity of a firm that sells goods. If this is the case, prices could be lowered because overall efficiency has increased.

This is not an unlikely scenario. We should remember that the adoption of credit cards is optional for a retailer (though once adopted, in Correction's understanding, a merchant cannot charge different prices). If consumers prefer a shop that can offer lower prices but demand cash, then competition will run out the shops offering credit-cards. This is a conjecture robust to a heterogeneous population.

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