Are exchange fees taxes?

Maybe.  I can accept that argument if by “tax” we mean any amount of money a consumer pays about the cost of producing the good or service in question, i.e. money that would be in my pocket if the government didn’t need to fund anything or businesses refused profit.  Very few people think of a tax this way, though those few tend to come from the vocal populists of the right.  In the strict sense of the term then, exchange feeds aren’t taxes, they’re just egregious business practices.

This issue has received a lot of blogosphere coverage the last few days in response to an NY Times article about Visa’s tricky debit card game.  If you sign when you purchase with your debit card, instead of entering your PIN, Visa receives almost twice as much money from the merchant.  (Here is Marginal Revolution, Felix Salmon, and Mike Konczal.)  To me, it feels like a simple story of dominant companies taking advantage of their near-monopoly position to divert consumer surplus into “producer” surplus.

The general reaction from the right, as seen in Tyler Cowen’s reaction, is detachment; this is the market, so it goes.  His solution is that stores could offer their own rewards (miles etc.) to entice consumers away from credit card  transactions, which are most expensive.  His refutation is hard to accept because it is anecdotal (ironic because Cowen usually avoids anecdotes to prove points) and not feasible for businesses: the corner bakery and local cafe aren’t going to band together to offer their own rewards.  The transaction costs are just too high.

Visa of course argues some baloney about market share and revealed preference.  My heuristic: if the first defense of a product from a financial person is that it enhances liquidity and adds value, that means they have no idea what the consumer-gain of their product actually is.

As Felix Salmon points out, running an electronic network is basically a commodity, so it’s not economically logical why credit card companies receive near-monopoly rents.  This is a general variant of the liberal response: the only beneficiaries here are financial companies, and the end result is a transfer of wealth from the hands of the many to the few (note that the “few” here are also well off credit card holders who benefit from rewards programs).

I side with those who don’t like to see big businesses abusing their market power.  While I am sure the data also supports the position that interchange fees to not help merchants (read Konczal’s good post for a more detailed explanation), I think the best short-term solution is to stop using plastic for transaction at independent businesses.  Because merchants have to pay a flat fee and then a percentage of the transaction, a $2 coffee paid for with plastic will more often than not lose money for a merchant.  I don’t really care if Starbucks or Target lose money if I choose convenience over conscience, but I do want my local cafe, independent grocer, and family restaurant to make as much money as possible.  That’s why I only use cash at those establishments, and I think it’s the best of both worlds: I use plastic enough to benefit from its convenience and rewards, but I use cash when not doing so would hurt a business I support.