Capitalism at Its Finest: Debit Card Edition

Andrew Martin exposes how Visa and the banks have colluded to increase the interchange fees charged merchants for debit cards.

Basically, because Visa can use its market share to force merchants to accept its products, and because it splits the interchange fees with the banks, it creates a situation where fees in the US are the highest in the world, and every merchant, and by extension every buyer, pays to shovel money to Visa and its client banks.

The reason for this is because Visa and MasterCard do not compete for end user consumers, they compete to get banks to offer their cards to end-user consumers, and they compete by raising prices, which they split with the banks:

As debit cards became the preferred plastic in American wallets, Visa has turned its attention to PIN debit too and increased its market share even more. And it has succeeded — not by lowering the fees that merchants pay, but often by pushing them up, making its bank customers happier.

In an effort to catch up, MasterCard and other rivals eventually raised fees on debit cards too, sometimes higher than Visa, to try to woo bank customers back.

“What we witnessed was truly a perverse form of competition,” said Ronald Congemi, the former chief executive of Star Systems, one of the regional PIN-based networks that has struggled to compete with Visa. “They competed on the basis of raising prices. What other industry do you know that gets away with that?”

This is only possible because Visa has a near monopoly, and even after it settled an anti-trust lawsuit, and agreed not to tie its expensive debit cards to all Visa products, merchants still cannot afford to diss the product, because the market share is too high.

This is, of course, what the Chicago School's "perfect markets" create: Monopolies and near markets that create market "stickiness" that ill serve anyone but the monopolist.

It's a capitalist's dream, but a consumer's nightmare, to the tune of about $427 per household per year.