The Antitrust Economics (and Law) of Surcharging Credit Card Transactions

When a customer uses a credit card, the merchant pays a small percentage of the purchase price to the bank that issued the card. This cost of card acceptance, known as the interchange fee, adds up to big money really big. This year, the credit card companies anticipate that interchange fees will total $48 billion, an increase of nearly 300% since 2001. Merchants can do little to influence these fees, because credit cards are critical to their businesses and the systems' rules prohibit surcharging. In recent years, commentators with growing levels of confidence have suggested that this anticompetitive rumble could be quelled if merchants had the power to surcharge card transactions. And now, fed up with the astonishing increases in interchange fees, merchants have filed more than 50 antitrust suits (now consolidated) against the credit card companies challenging the rules prohibiting surcharging and seeking the power to do it. This Article contends that permitting surcharging would likely do more harm than good. Under well established economic principles, charging merchants more than necessary to cover the cost of providing card-acceptance services can actually enable consumers to internalize all of the benefits (those flowing to both consumers and merchants) of card use. Just as newspapers efficiently charge readers much less than the cost of producing and delivering the morning paper, and advertisers pay much more than the cost of placing an advertisement, efficient credit card pricing requires that merchants pay more than the direct cost of service, and cardholders pay less. In such a two-sided market, shielding cardholders from merchant acceptance costs through rules prohibiting surcharging serves the pro-competitive purpose of facilitating efficient pricing. Today, unfortunately, card systems with market power go too far and charge merchants an additional, anticompetitive increment, above what is necessary to an efficient pricing policy. Card issuers may then retain some revenue as supra-competitive profit and wastefully compete some away in pursuit of highly profitable cardholders. Although surcharging potentially could combat this market power, it would be an uncertain and risky response, because merchants could not precisely tailor their schemes to undo only the anticompetitive overcharge. Moreover, retailers in competitive markets would find surcharging difficult because of the costs, particularly in terms of customer resistance. Merchants with market power probably could institute surcharges, but would be unlikely to channel all of the savings to their customers. In sum, the competitive benefits of permitting surcharging are more uncertain, and the losses in terms of consumer welfare more likely, than commentators have suggested. Whether consumers would benefit from the resulting disruption to the current market equilibrium would be, at best, anybody's guess. This Article proposes an alternative, less risky response that would focus directly on card system market power by relaxing the rule that requires merchants to accept cards from every issuer on the network (the "honor-all-cards" rule). Today, large banks issuing Visa and MasterCard cards effectively set their interchange fees collectively. By forcing these banks to compete for merchants, as American Express and Discover do now, this approach would stimulate competition and move card-acceptance costs toward the efficient level, without a significant risk of inefficiently disrupting the market.