2008-04-17T08:33:00.000-07:00

From the Website Hypocrisy.com

February 28th, 2008 • Cbanks

What happens when a company’s (or industry’s) activities exert a negative effect on the market?

It’s a subject I broach lightly, because I know that criticizing a particular company’s practices when they are not outright illegal can be seen as criticizing the market itself. I’m a firm believer in capitalism. The dog-eared copy of Rand’s “Capitalism: The Unknown Ideal” on my shelf is testament to that (and it’s much better than her turgid, unreadable novels).

However, through the consulting work I’ve done over the past year with a merchant coalition (unfaircreditcardfees.com) I have come to think that what Visa and MasterCard are doing with their merchant fees, known in the industry as “interchange fees,” rises to the level where a legislative remedy may in fact be necessary.

It’s unfortunate when it comes to this. It’s a market failure, and we have to be very careful in defining things.

But the fact is, U.S. interchange rates are among the highest worldwide precisely because the fees are set in secret and hidden from view. Raising interchange fees is how Visa and MasterCard encourage banks to issue more cards, and as long as rising rates are kept top secret, consumers have no way of knowing the extra costs they are paying. Visa, MasterCard, and the big bank credit card issuers win. Only merchants and consumers who are kept in the dark lose. That’s a a functioning market?

Visa and MasterCard operate like price-fixing cartels and violate federal antitrust laws. Visa issuers collectively set credit card interchange fees in secret and MasterCard issuers separately do the same. The fees can’t be negotiated and are not adequately disclosed to merchants or consumers. That’s why credit card interchange rates rise rapidly despite improved processing technology, consistently low interest rates, and rapidly rising card volume.

That doesn’t sound like a functioning market to me. If you’re still reading, I’d be curious to hear what y’all think.

(Note: Cross-posted from RedState)

Are Visa and MasterCard hurting capitalism?