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Interchange Redux —A U.S. Perspective

Competition Policy and Platform Industries IDEI, 30 June 2006 Tom Brown. Interchange Redux —A U.S. Perspective. Does Interchange Raise A §1 Issue?. Do not assume that the answer is yes. Typically invoke § 1 given strong prior beliefs about behavior in the absence of the alleged restraint

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Interchange Redux —A U.S. Perspective

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  1. Competition Policy and Platform Industries IDEI, 30 June 2006Tom Brown Interchange Redux—A U.S. Perspective

  2. Does Interchange Raise A §1 Issue? Do not assume that the answer is yes • Typically invoke §1 given strong prior beliefs about behavior in the absence of the alleged restraint • Think a price fix between two competing retailers • Absent the restraint they set the price dictated by local demand • No such belief here • What does a world without interchange look like? • Don’t bother asking the plaintiffs (their lawyers or their economists)

  3. Australian Regulatory Prescription October 2003 All systems must permit surcharging. Associations must admit specialized lenders. Associations must reduce rates ~95 bp to ~55 bp. Amex and Diner’s can charge whatever they want. Visa must eliminate HAC as to debit and credit. Visa’s debit IRF may not exceed RBA benchmark. February 2005

  4. Laws Of Nature Still Apply Every action produces an equal and opposite reaction Associations disadvantaged Amex, Diner’s advantaged Concentrated energy tends to disperse Cardholder prices increase Merchants’ costs decline Issuer revenue decreases Retail prices unchanged Merchants’ costs decline Retailers report higher profits

  5. Merchants Are Paying Less Today At current volumes, RBA has reduced blended cost of acceptance 3.0% 2.5% 2.0% Post % MDR Pre 1.5% 1.0% Post Pre Post Pre 0.5% 0.0% Visa et al. Amex et al. Weighted Source: Visa US Analysis; Visa Interchange Group

  6. No Free Lunch Merchants’ gain comes at cardholders’ and issuers’ expense AU$ Millions $500 $400 $492M $344M $295M $300 $200 $100 $197M $148M $0 First Estimate of Loss Share (Q1 2003) Second Estimate of Loss Share (Q1 2004) Merchant Gain Cardholder Loss Issuer loss Source: Chang, et al., Economic Effects of RBA Regulation, 2005.

  7. Business Is Shifting Amex and Diner’s volume has increased 20% Open Share Closed Share Open Closed Rate caps effective Source: Chang, et al., Economic Effects of RBA Regulation, 2005.

  8. Driving Product Innovation Higher interchange increased competition, lowering merchant costs US Commercial Product Volume by Network, 1993-2004$Billions MDR/IRF Rate American Express (CAGR 9.8%) Visa (CAGR 36.7%) 1: Worldwide discount rate Note: 1993-1995 are estimates based on Visa internal analysis Source: Visa US PIC Analysis; Visa Interchange Group

  9. These slides do not represent legal advice, and they do not offeranyone’s views on this subject but my own.

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