Suppose that paying for your morning coffee with an American Express card cost more than using Visa or Mastercard, which in turn cost more than cash. That would reflect merchants’ true expenses for the competing payment systems, according to Chicago Booth’s Dennis W. Carlton and University of British Columbia’s Ralph A. Winter.
But under US rules, merchants aren’t allowed to add surcharges to reflect their costs for taking credit cards. They can’t even try to steer customers by disclosing which cards carry lower expenses (although discounts for cash are legal). The judicial decisions behind this include the Supreme Court’s five-votes-to-four ruling in June that sided with American Express on its policy barring merchants from encouraging consumers to use lower-cost cards—but are, according to Carlton and Winter, based on faulty economic reasoning.
These decisions allow credit-card companies to engage in what would otherwise be considered anticompetitive behavior, the researchers write. In 2015, buyers used credit cards for roughly $11 trillion of transactions, or more than 10 percent of global GDP. Carlton and Winter use an estimate of US merchants’ costs of accepting Visa and Mastercard of 2.15 percent, and say AmEx’s fees are higher. Credit card merchant fees in the US are estimated to be in the billions.
The no-surcharge and no-steering rulings eliminate competition among credit-card companies because a low-cost credit-card company will not see its low fees reflected in lower surcharges and a higher market share, Carlton and Winter explain.
To make their case, the researchers present a theory for “vertical most-favored nation clauses,” restraints that prevent “a multiproduct retailer from charging more for one supplier’s product than for the products of rival suppliers.” Carlton and Winter then apply the theory to the credit-card industry’s no-surcharge and no-steering rules. These practices, they find, can jack up costs for all consumers—regardless of whether people pay with plastic or cash—because they eliminate competition among card companies, deter card companies from entering markets they’re not in, and raise prices for consumers, including those who do not use credit cards since merchants have to price goods to cover payment-system costs.