Merchants have grown ever more willing to accept credit and debit cards for small transactions. This is how Redbox movies has made its profits and put new movies in high quality at nearly everyone’s fingertips. It is easier to get a movie than a value meal. It’s true at the convenience store too. You don’t have cash, so you pull out the card to pay for the bottle of juice or the Snickers bar.
Online it is true too: Buy a small thing or donate to a small charity with micropayments. This is just part of modern life — something we have learned to love and take for granted. It’s wonderful and innovative. It makes our lives better and the world a more beautiful place.
How could it end? Get the politicians involved. And they have gotten involved and it is all coming to an end. It is ending through a circuitous route that takes a few minutes to understand. So let me explain this.
As part of a political “crackdown” on the financial world, the Dodd-Frank Act passed last year, the fees that credit card companies can charge merchants now have a cap of 21 cents per transaction. The geniuses in Congress figured that this would save money for consumers
because the average fee is actually 44 cents. The masters of the universe figured that passing a law could make the world right. Oh, how necessary are their powers and privileges!
But you know what? The world is a bit more complex than that. What actually happened to make small transactions profitable was that companies would charge a high fee for large tickets and use that revenue to subsidize the costs of smaller transactions. Smaller transactions were not averaging 21 cents. Instead, they cost 6 or 7 cents. This was made possible by the high fees that the politicos decided to legislate out of existence.
This makes financial sense in many ways. Card companies have every reason to maximize the number of institutions that use their services. Spreading out the variable costs according to a heterogeneous model does precisely this. It works, as all things in the market tend to work.
Maybe you can figure out already what is happening. If companies can no longer subsidize small transactions, they have to spread the revenue model among everyone equally. No longer able to charge 44 cents, they can now charge only 21 cents. But transactions that used to cost 6 cents are also going up to 21 cents. This is intolerable for small merchants.
An immediate effect is that renting from Redbox will go up 20 cents, to $1.20. That is politicians picking your pocket. Many merchants are already declining to accept credit cards at all for purchases under $10. It’s their right. It’s their choice. If they can’t make it work financially, they will end the practice. For other small merchants, like convenience stores and candy stores, this is nothing short of catastrophic.
Vending machines? Enjoy it while it lasts. Many of those machines will be shut down, or else the price of a can of Coke will have to go up 20%. You might soon have to go back to fishing for change and flattening out dollar bills.
Incredible, isn’t it? Yes it is. Here is a piece of legislation that was supposedly designed to help you and me. Heaven protect us from their help!
Look what they have done. They have smashed one of the great emerging conveniences of modern life. How many small donations will no longer be made? How many micropayment widgets and systems will now go belly up? What kind of charitable projects and small web-based businesses will not come into existence because they can no longer afford the costs of doing business?
And all of this is happening in these terrible economic times. It’s been blow after blow, delivered by the political class that claims to be stimulating the economy. To be sure, the credit card companies warned that this would happen. They said it would kill their business model. But the
politicians are inclined to treat every complaint by business as a lie. So they dismissed it. They figured, hey, we put a price cap on something and the world obeys our dictate, so what’s the downside?
The downside emerges only later. And hardly anyone will really understand the cause. All they know is that the price of movie rentals will go up, and they blame business. Everyone blames business for everything. Meanwhile, these puffed-up mini-dictators are hiding in the corner hoping that no one notices the mess that they make of the world.
Here is an archetype of what is often called “unintended consequences” of government legislation. This is just one tiny piece of a much-larger puzzle. Multiply this many millions of times and you gain some insight into why the world is such a mess. The politicians try to fix it and it only gets worse. Here is a general rule: Politicians should do nothing, ever, except repeal their rotten attempts to make our lives better.
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