How Card Regulation is Killing Competition

Competitive Enterprise Institute | August 6, 2013

If you think there isn’t enough competition in the payments industry, just wait a few years – there will be a lot less in the U.S. and European Union. Before I explain why let’s take a survey of the state of competition. No, the payments card industry is not a perfectly competitive industry that would warm the cockles of your micro-econ college professor’s heart. But then, what is?

In the U.S. we have Visa, MasterCard, American Express, and Discover, not to mention PayPal, several PIN debit networks, and a lot of startups, all slugging it out. In the EU the state of competition varies by country, but Visa, MasterCard, American Express and often some domestic systems are competing. Visa (either International or its European doppelganger) is the big dog in a lot of places. But Visa has a lot more competition than the leading player does in a lot of industries. And considering that payment card schemes have enormous network effects and scale economies, if anything, there’s a surprising amount of competition.

There’s been a lot of talk about even more competition, and challenges to the established players, in the U.S. and EU.

The Europeans have never been very happy that Visa and MasterCard – both perceived as U.S. companies (yes, this is odd given that Visa Europe is owned by European banks, but there you have it) – are the leading pan-European players. Then they got very worried when the efforts to create the Single European Payment Area (SEPA) picked up some steam. The Brussels-based Eurocrats and politicians fretted that Visa and MasterCard would wipe out the many domestic schemes. As a result there was a big push to create a homegrown pan-European system. The Monnet project, for example, consisted of a group of European banks that were considering giving Visa and MasterCard a run for their money.

In the U.S., the PIN debit networks consolidated and there was talk that they would compete with MasterCard and Visa. The telecoms started Isis, which was originally going in with a low-fee model. There have also been a slew of startups, from the long-gone Revolution Money to the on-a-hot-streak LevelUp, which have gone after the establishment with interchange-fee-buster models.

Sounds great: pretty competitive, and getting even more so! But leave it to the government to mess up an industry. Consider what’s happening in Europe. The European groups that were considering challenging MasterCard and Visa have all bit the dust. They needed revenue to enter. But with the European Commission insisting that it was going to stomp down interchange fees – possibly even to zero – they have abandoned those efforts. Meanwhile, the domestic schemes are facing a world of hurt because they are likely to lose the ability to compete with MasterCard and Visa by offering higher interchange fees. In perhaps the weirdest development of all, the European Commission has proposed legislation that will prohibit merchant surcharges for MasterCard and Visa but allow them – ‘encourage’ is probably a better word – for the three-party systems such as American Express and Diners Club. Yup – stigmatize the underdogs.

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