As most folks are aware, one of the bedrock beliefs of conservatives is that markets and commerce should be free from the heavy hand of government regulation. Yet since the election, in which conservatives retained control of both chambers of Congress and also won the White House, retail groups have adopted a messaging strategy premised on an unusual application of free market ideals: “If debit reform is repealed, there goes the free market,” they proclaim. Translated: Repealing the government-imposed interchange fee price controls put in place by the Durbin Amendment and allowing the market to act freely would be bad for the free market.
Is anyone else struggling with this logic?
But retailers quickly fall back on their tried-and-true (and tired) proclamation that it’s all the fault of card issuers and payment card networks like Visa and MasterCard. But why?
EXTREMELY SIMPLIFIED EXPLANATION OF ELECTRONIC PAYMENTS: Visa and MasterCard operate platforms that connect cardholders who want to buy stuff with merchants who want to sell stuff. Instead of handing over cold, hard cash (which is a costly pain for merchants to handle), cardholders present a card or payment device, and the card-issuing financial institution guarantees the merchant will get paid for whatever was purchased. To take this risk and absorb the compliance costs of maintaining such a program, the card issuer receives a fee from the merchant. Since it would be impossible for 20 million or so merchants to negotiate bilateral arrangements with the 14,000 or so banks and credit unions in our country on card acceptance, the intermediary payment card networks built platforms and infrastructures, and determine the rules and costs of participation for each side.
Let’s naively pretend for a moment that merchants would be even-handed in their opposition to the way the card networks operate, not purely motivated by self-interested rent-seeking, and engage in a fun thought experiment: Using their standard for what constitutes an anti-free-market firm or industry that’s in need of some old-fashioned government intervention, who else might make the list of offenders?
Uber, Airbnb and eBay: Through Web sites or mobile apps, each of these firms operate platforms. Each sets the rules for participation, and each assesses fees on various parties that are non-negotiable by the counterparties. Drivers have a predetermined percentage taken from their fares, renters are charged “guest service fees” and landlords are charged “host service fees,” and auction sellers usually have a percentage of the final sale of their item deducted from what they receive.
Google and every online and print media outlet: People visit sites like google and cnn.com, or buy copies of the Washington Post or New York Times, and advertisers pay for the privilege of getting more eyeballs or clicks on their sponsored links or ads. Each of these outlets must create a value proposition for both sides: quality content to attract readers or users, and a fee structure representing the value of those eyeballs to advertisers. If they get either side of that equation wrong – crummy content that drives away readers thus discouraging advertisers, or ad placement fees that drive away advertisers and thus the revenue required by these platforms to keep the proverbial lights on – the system fails.
Sony and Microsoft: Through their Playstation and Xbox consoles and online ecosystems, these companies bring together cutting-edge developers and gamers. These two platforms are in fierce competition for both: They vie for top developers by providing resources, software development kits and an audience, while charging licensing fees and requiring developers to hold E&O insurance. They compete for gamers on the price of console technology and access to online services like Xbox Live.
Singles bars everywhere: “Ladies Night!” With those magic words, countless college bars are making the bet that a 3:1 ratio of guys/gals in a bar is not a recipe for success, and that men are willing to subsidize the attendance of more women to something closer to 1:1. Again, it comes down to the value proposition each side is willing to pay to enjoy an evening in a given bar: If women are incentivized by the reduced cost of attendance, and men are incentivized to attend by the higher number of women (despite the additional cost), that’s a win-win-win for all involved.
Every single one of these entities or industries is guilty of violating retail groups’ idea of what constitutes a “free market.” If they truly believed in the snake oil they’re selling, they’d be attacking each of these groups with the same rhetorical vigor with which they attack the payments industry.
But they won’t, because the warped idea they spin of “free markets” is not much more than a sad attempt to appeal to conservatives currently in charge of government. Conservatives should see through this charade and repeal the Durbin Amendment’s price controls that started this mess.
Jason Kratovil is the Vice President for Payments at the Financial Services Roundtable