Economic Analysis: Regulating Interchange Shifts Market’s Economic Basis

by Mercator Advisory Group 0

Late last year, a consortium of Spanish academic and legalexperts, examined the impact of interchange fee regulations in Spain. This body had the advantage of examining data across a five year span, sinceinterchange fees were initially regulated in Spain in 2005, and the surveycovered the years 2005 to 2010. In this article, one of the study’sauthors was interviewed, he states:

The Spanish experience hasn’tbeen positive and holds five or six negative consequences on the economy: incomeadjustments for the agents and imbalances of the market; fee and price upsurgesfor consumers; lower growth of electronic payments versus cash; moreunderground economy; less innovation; less convergence with the rest of Europe,and so on.

Looking at the originalreport that is the basis for this opinion, we find the following:

This has altered the fourparty system, which favours other less participatory systems and reduces incentivesto innovate to improve the quality and safety of the service.

As we know, payment innovation is being driven into themarket from private capital-funded entrepreneurs who are able to competeoutside the boundaries of payments industry regulators. The problemthey’re beginning to run up against now is that fact that they need scale to beeconomically viable which will not be achieved without participation by thelarger market participants. In turn, this will continue to foster amigration away from reliance on interchange fees in favor of fee-basedrevenues which have to be value-justified.