While Americans rely on debit transactions for the necessities of life, most are unaware of the networks that drive those transactions, nor are they aware that one company, Visa, has monopolized debit transactions, penalized industry participants that seek to use alternative debit networks, and co-opted innovators, technology companies, and financial institutions to forestall or snuff out threats to Visa's debit network dominance.” So begins the monopolization lawsuit filed on September 24 by the United States Department of Justice (DOJ) against the country’s largest card company, Visa Inc. On one level, the case is simple: The DOJ alleges a clear violation of laws protecting markets against monopolies. But the case gets more complicated when looking at the details, in part because payment systems are mostly invisible part of the financial ecosystem. In effect, the DOJ alleges that Visa is pulling the levers of a really opaque and complex system to preclude competition and squeeze fees out of banks and vendors for itself.To understand the complexities and implications of the case, Bethany and Luigi are joined by Kathryn Judge, Harvey J. Goldschmid Professor of Law at Columbia University. Judge is an expert on banking, financial crises, regulatory architecture, and intermediation design beyond finance. Her book, Direct: The Rise of the Middleman Economy and the Power of Going to the Source (HarperBusiness, 2022), was on the long list for the Financial Times Business Book of the Year Award. Together, the three of them discuss both the surface-level and structural issues of an economy where consumers and small businesses are shortchanged on what is essentially a private sales tax on all debit-card purchases—and how to look for collective solutions when opt-outs aren’t possible.
While Americans rely on debit transactions for the necessities of life, most are unaware of the networks that drive those transactions, nor are they aware that one company, Visa, has monopolized debit transactions, penalized industry participants that seek to use alternative debit networks, and co-opted innovators, technology companies, and financial institutions to forestall or snuff out threats to Visa's debit network dominance.” So begins the monopolization lawsuit filed on September 24 by the United States Department of Justice (DOJ) against the country’s largest card company, Visa Inc.
On one level, the case is simple: The DOJ alleges a clear violation of laws protecting markets against monopolies. But the case gets more complicated when looking at the details, in part because payment systems are mostly invisible part of the financial ecosystem. In effect, the DOJ alleges that Visa is pulling the levers of a really opaque and complex system to preclude competition and squeeze fees out of banks and vendors for itself.To understand the complexities and implications of the case, Bethany and Luigi are joined by Kathryn Judge, Harvey J. Goldschmid Professor of Law at Columbia University. Judge is an expert on banking, financial crises, regulatory architecture, and intermediation design beyond finance. Her book, Direct: The Rise of the Middleman Economy and the Power of Going to the Source (HarperBusiness, 2022), was on the long list for the Financial Times Business Book of the Year Award. Together, the three of them discuss both the surface-level and structural issues of an economy where consumers and small businesses are shortchanged on what is essentially a private sales tax on all debit-card purchases—and how to look for collective solutions when opt-outs aren’t possible.
Episode Notes: Also check out the ProMarket article “A DOJ Victory Against Visa May Not Help Merchants or Consumers” by Lulu Wang, Assistant Professor of Finance at Northwestern University’s Kellogg School of Management.
One of the indikia that I would look for of is this an area where I want to dig
a little deeper for a problem of the middleman economy, is it's an area where it
seems like technological change should have really disrupted the rule of the middleman
and it hasn't. And that's a sign that there's something wrong.
I'm Bethany McLean. Did you ever have a moment of doubt about capitalism and whether
greed's a - Good idea. - And I'm Luigi Zingales. - We have socialism for the very
rich, rugged individualism for the poor. - And Mrs. Capital isn't a podcast about
what is working in capitalism. - First of all, tell me, is there some society you
know that doesn't run on greed? - And most importantly, what isn't? - We ought to do
better by the people that get left behind. I don't think we should have killed the
capital system in the process. - While Americans rely on debit transactions for the
necessities of life. Most are unaware of the networks that drive those transactions,
nor are they aware that one company, Visa, has monopolized debit transactions,
penalized industry participants that seek to use alternative debit networks, and co
-opted innovators, technology companies, and financial institutions to forestall or snuff
out threats to Visa's debit network dominance. So begins the lawsuit the Justice
Department filed against Visa on September 24th, which alleges that Visa illegally
maintains a monopoly over debit network markets. Earlier today, the Department of
Justice sued Visa for violating Sections 1 and 2 of the Sherman Antitrust Act. We
alleged Visa is a monopolist in the debit transaction markets that is violating
federal antitrust law and inflicting often hidden, but significant harm on American
consumers and businesses. According to the complaint, more than 60 % of debit
transactions in the United States run on Visa's debit network. Visa operates the
largest debit network in the United States. A debit network facilitates the electronic
transfer of funds directly from a consumer's bank account to the merchant's bank
account in a retail transaction, allowing it to charge over $7 billion in fees each
year for processing those transactions. Merchants and banks pass along those costs to
consumers, either by raising prices or reducing quality or service, said Attorney
General Merrick B. Garland. As a result, Visa's unawful conduct affects not just the
price of one thing, but the price of nearly everything. On one level, the case is
simple. The Justice Department alleges that visa is violating section one and two of
the Sherman Act. Now, for those who are not that familiar with those sections, let
me try to explain. Section one makes illegal any contract, combination or conspiracy
that unreasonably restrained trade. In this particular case, what is alleged is that
visa is paying participants like Apple not to compete against visa.
Section two is so -called the monopolizing behavior. So if you're trying to do a
behavior that use your monopoly power in a relevant market to willfully acquire or
maintain that power. In this particular case, what Visa does is that it offers
volume discounts to some of the participants who are particularly big. Now, clearly,
if you have a bigger incentive to get out of the monopoly of visa.
And so if you're subsidized to stay in or you pay a lower cost, then you stay in
making more difficult for rivals to compete. - But on another level, the case is
really complicated. Although I think Luigi, even section one and section two of the
Sherman Act might be complicated too, but it gets more complicated when you look at
the details of the case. And that's in part because payment systems, which are
effectively the ways in which a lot of money moves in a modern economy, are a
subterranean and mostly invisible part of the financial ecosystem. Visa, for instance,
makes its money by taking a set of fees that amount to just a fraction of each
debit transaction. Consumers don't see it, but merchants and financial institutions do.
In effect, the Justice Department alleges that Visa is maneuvering in the dark,
pulling the levers of a really complex system in order to make more money for
itself. And wow, does VISA make a lot of money. The Justice Department's case notes
that VISA has a global operating income of $18 .8 billion, which equates to an
operating margin of 64%. And North America is even more profitable with a 2022
operating margin of 83%. Oh my goodness, that's just semi incredible.
So, Luigi, you were kind of explaining how there are two components to the case,
but maybe filter that through the lens of the Justice Department's case if you can.
I will, but let me add that 83 % of margins, I don't think even selling drugs give
you that margin. No. Sometimes we'll sell it. Even the pharmaceuticals are pretty
high, but the real drugs, I think they don't sell at that margin. Anyway, One part
of the case involves the old ecosystem. The Justice Department alleges that Visa has
used its market cloud to extract promises from customers that they will use Visa's
system. As the case put it, most merchants face staggering financial penalties each
year unless they route all or nearly all eligible debit transactions to Visa.
The government notes that Visa itself calculated by the end of 2022 at least 75 %
of all is that volume where insulated from competition by its rival through its
contracts. But the other part is the new ecosystem or what should have been the new
ecosystem. The case also alleges that Visa uses PONOVERLY power to stifle emerging
fintech competitors like Apple Pay and PayPal. As Visa's then -CFO put it,
"Everybody is a friend friend and partner, nobody's a competitor. That's CFO that
added the only issues to figure out how to make it worth their while to partner
with us. - In response to the government's case, Visa's general counsel has said
this. "Anyone who has bought something online "or checked out at a store knows there
is an ever -expanding "universe of companies offering new ways to pay "for goods and
services. "Today's lawsuit ignores the reality that Visa is just one of many
competitors in a debit space that is growing, with entrants who are thriving. So I
found the evidence in the case about how an actuality Visa has stifled or co -opted
these competitors to be a really compelling part of the case. For instance, according
to the lawsuit, Visa worried that Apple, which could have developed its own
proprietary payment network, was an existential threat. So instead, Visa pays Apple to
make Apple pay an on -ramp for Visa's system. Or take PayPal. In 2016,
according to the case, Visa signed a massive deal with PayPal to squash the threat
of consumers paying directly with their bank accounts, instead requiring them to use
Visa's systems. If PayPal didn't do this, they risked losing customers who used Visa
on its platform if it told them they could no longer use their Visa branded cards,
so the government said it had little choice but to take the deal. The funny thing
is that while visa operations are invisible to most of us, the Justice Department
case is just the latest solve against the company, which has been controversial. So
they are not invisible to merchant users like Home Depot and Starbucks, who have
waged an antitrust battle against visa for almost two decades. The government has
also tried credit card fees and encourage competition. Even as we record, two
senators are trying to get traction for something called the Credit Card Competition
Act, which they would say would reduce Visa's fee. This particular investigation
actually came from a 2021 DOJ investigation following the merger between or the
acquisition or pled by Visa. The DOJ stopped that acquisition and after that started
to an investigation of visa itself. But of course, it's a whole different thing when
the federal government gets involved. Should the government prevail in this case, it
has the ability to force remedies that aren't available to civil plaintiffs. In
addition, it's a sign, I think, of the increased activism of the government under
President Biden. Luigi, what stood out to you about the case? How convincing do you
think it is? There enormous net to externalities. Okay, so we all want to use the
mean of payment that other people use because carrying a lot of different means of
payment is costly and makes perfect sense to what we all coordinate. Increasing
competition in the credit card market is not necessarily paradoxically welfare
improving because you have more fragmentation. The better way to approach this,
in my view, is on a regulatory matter by forcing interoperability, or by creating a
common standard and have everybody operate under the common standard. In my view,
there is no doubt that Visa is a monopoly or oligopoly, that Visa has market power,
and that DOJ can prove the alleged case that Visa has abused that market power.
The question is more, what is the remedy because there could be a solution in which
the remedy is worse than the disease?
That's really interesting. Part of what interests me is that so far the reaction has
been relatively muted. Visa stock has regained most of the losses that it suffered
when the lawsuit was announced and the market simply doesn't really seem to care.
One investor told me that they've long regarded, the money Visa has to pay for
settlements and civil litigation is simply part of its cost of doing business. And
maybe that's partly why no one is really focused on this lawsuit as some kind of
existential threat to Visa. But this is a reason why I think should be a big deal,
especially for us at Capitalism, because we're focused on issues just like this.
What defines fair competition. What does the government need to do in this particular
case? Should you get involved? Should you improve competition? Should you regulate?
And who is really paying the cost of this monopoly? Because at the end of the day,
it's almost like an invisible tax that we all pay, but for each one of us, it's
sufficiently small that we don't complain. We thought we would discuss all of this
with Catherine Judge. She's a professor of law at Columbia University and an expert
on banking, financial crises, regulatory architecture and intermediation design. She's
also the author of the book, Direct, the rise of the middleman economy and the
power of going direct to the source.
So Kate, let's start with your work on the middleman economy. How do you define a
middleman economy and what makes a middleman good or bad? Yeah. I mean, so what's
interesting about middleman is they are both good and bad in so many different
settings. We have intermediaries or middlemen who start off doing really helpful
things. They help overcome all the challenges that we have with transacting. They
help overcome information asymmetries. They help overcome challenges with trust,
overcome the challenges that two people might be very disconnected. And in the
process, they become experts. They develop relationships. They oftentimes develop really
critical infrastructure. It also gives them outsized power and what we often time see
then is I'm using this power both in their private settings But also in the
subsequent shaping of regulation in ways that tend to Entrench their position and
oftentimes just be managing the people on both sides I would like to start with one
that most of us are familiar with and you discuss also in your book the real
estate brokers so what is unique of the American real estate brokers,
because outside of the United States, things are very, very different. Yeah. No, real
estate is a great setting for precisely the reason you point out is that whenever
you can see the same type of transaction happens, the world over, and yet it costs
consumers a lot less almost everywhere other than the United States, it's a sign
that the system we have in the United States probably doesn't work all that well.
And really, you can look at the history of how the system evolved. And again, so
we had traditionally a system where you had brokers representing both buyers and
sellers. The seller paid the fee that actually covered the cost of both brokers.
So we had traditionally a system where you had brokers representing both buyers and
sellers. So when you went to a full service brokerage, they would have all this
information about your house, they would put it into the multiple listing service,
the MLS, And then the brokers were representing buyers would be able to go to the
MLS and say, "Well, for your budget, for the neighborhood you want to be in, here's
a bunch of different houses." So it's a lot more efficient than classified ads where
the alternatives might have been. So at first it really helped sellers who wanted to
find the buyer that was willing to pay the highest price. And it helped sellers
provide, have access to much more robust set of information. What we saw happened
over time is real estate agents collectively use their control over the MLS to
effectively prevent lower cost alternatives from coming into the market by making it
so the buyers agents really wanted to make sure that they were going to get kind
of their full commission and so they would steer people away from options that
actually we're not going to offer the full commission to the buyer's agent and
really going back to the international comparison, that's where a lot of the
inefficiency comes in. But it was exacerbated by the political influence they had.
So one of the things that real estate agents did was one of the best ways to opt
out of this system was to get a broker who said, "All right, I will represent you
and I'll take the 3%. Let's say real estate, the in 6%, it's going to be spit 33.
I'll take the 3 % and I'll give 2 % back to you. This was actually made unlawful
in 15 states. At one point, the number has gone down because real estate agents
managed to convince legislators that this was really, really bad for consumers when
really the only people who are harmed were the real estate agents. Being probably
the only one old enough to have bought property before the introduction of the
internet. I can testify that the multiple listing service was a fantastic thing.
However, even before the political side, I think that the two -sided nature of this
business really entrenched them in a way that is remarkable. So what I want to
stress with our listeners is the trick was the following. If you are a buyer and
buyer tend to be more finicky than sellers, sellers want to sell, buyers are maybe
I'm gonna buy, maybe I'm gonna rent, whatever. If you are gonna a buyer, it will
cost nothing out of pockets to hire a real estate agent. And as a result,
basically every buyer on the face of earth will have a real estate agent. Now,
given this, what was kind of coercive in my view was the type of contract that the
real estate agent were having with the seller because with a seller they say you
have to pay us 6 % but all these 6 % 3 % is given to the real estate agent or
the buyer and so if you get a real estate agent the real estate agent will never
show you a property where he didn't get a 3 % And so the ability to counter on
one side really locked the market in a way that even with the internet was not
easy to undo. That's a great summary and that's exactly the challenge. And part of
the reason that when you're dealing with a middleman economy, it is very hard
oftentimes for individual opt -outs to be the mechanism through which we actually
bring about structural change because there, you know, if you're the seller, it's
rational for you to effectively bribe the buyer's agent with a 3 % commission because
you don't want a lot of potential buyers not to come to your house. So this is
why we need a collective solution. So moving on from real estate, at least sort of,
you wrote this, which resonated with me as I read the Justice Department's case
against Visa. You wrote, "The very attributes that make middle men good connectors
also give them outsized power. In time, this enables them to expand their domains
and trench the need for their services, contort consumer decision -making, and
otherwise promote their interests at the expense of those they are meant to serve.
In the Justice Department lawsuit against Visa, they wrote, "Visa, one of the most
profitable companies in the United States, has succeeded so thoroughly in insulating
itself from competition that it is now earning outsized profit margins from its role
as a an intermediary, a digital middleman at the center of the debit transaction
market. Do you think of Visa as a classic middleman? Are there ways in which it is
and ways in which it isn't? In many ways, it is classic. In the sense, it first
arose to influence because it is providing a really useful service. And it is a
situation where there's clear network effects. So the more people on both sides that
you have signed up to your work, the easier it's going to be for buyers and
sellers to connect. So it works really well for everybody. And then the challenge
arises after your visa, and you have 60 % of the volume,
there's a whole variety of transactions, we are going to be the only network where
both the buyer and seller are able to connect using your network. Well, then the
merchants have no choice but to use you in those settings. For that subset, buyers
and sellers have no choice whatsoever to say, we're going to give you a better
price for those narrow transactions when we're the only ones that are an option if
you also use us in these other circumstances where you do have a choice. So you're
effectively precluding the ability of other networks to come in, offer lower prices,
and really compete away at the monopoly that visa is built up. - It seems that at
the core of the Justice Department's case against visa is this issue of non
-contestable transactions. These transactions where visa automatically controls it.
And so that is what gives them the leverage to demand pricing power and demand
merchant loyalty on other transactions. What are the non -contestable transactions?
I've read the case a whole bunch of times and I couldn't grasp it, so I'm
embarrassed to admit that, but I need somebody to explain it to me. No, it is
actually really difficult, and it's because the payment system and the way it
operates is really difficult. The key idea is that one of the ways the Durban
Amendment, which is part of the Dodd -Frank Act, tried to bring additional competition
to the space was to make a requirement that for every debit card, it has the
ability to opt in to two different networks. That way, as a consumer, when I'm
coming to the table, I have two different networks, and merchants have the ability
to be, in theory, affiliated with as many different networks as they want. But as a
practical matter, once you have a dominant actor like Visa, for almost all of those
consumers, there's going to be a subset where Visa is one of the networks that
their card is opted into, but they're opting into another, which might or might not
be a network that the merchant is a party to. And so the non -contestable
transactions are the ones where the only network that both is an option given the
consumer's card and that is an option given the networks that this particular
merchant has chosen to opt into, that Visa is the only one that they've both
managed to match on. So you could think about it as a matching challenge. Got it.
That makes sense. You know, there are two reasons why I want to started with a
real estate broker is one is recently the DOJ won a big case against real estate
broker. The second is, I think there is a very strong parallelism with the payment
process because what makes made the real estate broker system so stable was precisely
the fact that one side was heavily subsidized in a way that was difficult for him
to resist. And the same is true with Visa. So why don't you explain to our
listeners what is this subsidization that makes rational for all of us not to
deviate? So you don't actually see the cost, just like when you're the person buying
real estate and you don't directly experience the cost. And this is a consistent
challenge. And again, it makes sense for structure of transacting to only one of the
two parties bear the cost, but it doesn't make one party cost insensitive. And then
that creates structural challenges because the dominant player needs to only exercise
leverage over the party that actually would otherwise be cost sensitive. So here it's
the merchants, right? Merchants are very, very, very attuned to the amount of money
that they're paying to Visa to process these transactions, but for the individual
buyers and sellers, you're not experiencing any of that cost. And again,
it's a circumstance where those costs to you would be really modest even if we
think that maybe they're passed on through alternative mechanisms. So it's not worth
it to you to invest any effort to really understand how the system works or to
open up different alternatives or options for the sellers from whom you're buying
things. - The moment why I understood the problem with Visa is when I was in a cab
in Rome, the Italian cab drivers are notoriously against any form of credit cards.
And there was an advertisement for Alipay. So the Chinese had arrived in Rome.
And why they arrive in Rome? Because Alipay is so much cheaper than Visa is not
even funny. And so all of a sudden you realize that it doesn't make any sense and
you need to fight in some way the system because not only damage consumers in the
United States, but at the end of the day, damage also the competitiveness of the US
economy because you're going to have fewer, fewer people use American system of
payments and more and more using other method of payments, particularly Alipay. No,
and it's a key point and that's one of the challenges with the middleman economy
And so one of the indikia that I would look for of is this an area where I want
to dig a little deeper for a problem The middleman economy is it's an area where
it seems like technological change should have really disrupted The rule of the
middleman and it hasn't and that's a sign that there's something wrong Going back to
the real estate broker example because I think it's easy for people to grasp, it's
very inefficient to have two multiple listing services. You do want to have one
because you have all the properties there and it's much easier to search. And so if
you were to try to enter by creating an alternative market, at the beginning you
are creating enormous inefficiencies and even at the end, unless you replace it
completely, if you have two segmented markets, I'm also sure that consumers are
necessarily better off. So my question is maybe we're going the wrong way because
rather than trying to go the antitrust way, we need to go the regulatory way by
forcing interoperability. I don't know if you're familiar with what's happening in
India, but in India they create a uniform payment interface that is basically public
domain And so anybody can use that and benefit from the natural externalities,
but nobody owns that structure. That makes it a much more competitive system.
Why is it so difficult in the United States to go in that direction? It's precisely
the right question to ask. For a lot of these challenges, antitrust is an important
tool to be brought to bear, but it's going to be incredibly incomplete. Are there
alternative mechanisms, whether it's through interoperability or other bottom -up
mechanisms of making it less costly for people to opt out of the dominant system.
So I mean, payment space is a great example of this. And you've mentioned that both
China and India have done a great job moving ahead. We've seen actually Brazil move
ahead with PICS, with a distinct central bank digital currency. - You mentioned the
Brazilian PICS. I imagine a lot of our listeners don't know what this is. This is
a system of payment designed by the Basilea Central Bank and provided basically for
free to all the banks and all the intermediaries. That is free to operate to a
level that you go to the beaches on Rio de Janeiro and you see the people selling
stuff, something like coconuts with a QR code and the picks. Okay,
so this is really a very effective alternative as a mean of payment. and you
wonder, where is the United States? Now, if you wonder, first of all, the United
States is late to the game, and introduced FedNow only a year ago, and FedNow was
introduced very gingerly, not pushing it too much, by the very wards of the Federal
Reserve Bank, not to disrupt the deposits of the bank, so to protect the monopolies
of the banks. And The next step in this big debate is the so -called central bank
digital currency or the so -called CBDC. So can you tell us why this is such a
contentious issues and where do you fall in this spectrum? One of the reasons it's
such a contentious issue is what we actually mean by a CBDC is a whole bunch of
different things. So the Fed has at times considered whether or not it might issue
a CBDC at some point in the future. It has been very clear it would not do so
without direct instruction to do so from Congress. But when they contemplate doing
this, they are contemplating doing it in a way where banks would still be the key
players through which you actually have the account. And that makes a big difference
as opposed to the idea some have had of, we're gonna have a bunch of retail and
consumers, so folks like all of us, with an account directly at the Fed, we're
gonna earn the same rate of interest on our accounts that the Fed earns. One of
the reasons it's gotten to be so controversial is one of the things that we ask
banks to do is to effectively play a role monitoring, one could even say spying,
the entire citizenry and non summary, anybody who's really engaging in any way with
a US bank or a correspondent bank, there's a bunch of affirmative obligations we
have in terms of retaining information about those transactions and reporting on those
transactions. So one of the reasons this has become very controversial is there are
a lot of questions over whether we want all of that information, which is very
personal at this point because every time I go on the subway, I effectively swipe a
credit card or perhaps a debit card. Now all that information could be directly in
the hands of a central bank and what might they do with it? And I think one of
the reasons the central bank doesn't want this to be done directly is they don't
want to have any responsibility whatsoever for trying to assess or analyze the
suspiciousness of transactions. And they don't want to actually have this type of
data about our behavior. - I want to pause a second on what you said because I
think is very meaningful. If I understood correctly, you said that the Fed does not
want the responsibility to actually implement the rules imposed by the Fed,
because all the AML things, etc., are created by treasury by the Fed in order to
do a perfectly legitimate important role, which is to screen against money laundering.
But the Fed was not going to be responsible be responsible to actually follow up on
its own directives. Yeah, I'm happy to say that, but I think it's important to know
what we're actually talking about with directed directives and what the Fed thinks
it's good at and the Fed thinks it's not good at. I mean, the Fed right now is
structured to be a bank to banks. In asking it to instead provide perhaps direct
accounts to people all over the country, you're changing dramatically. The nature not
only or not only of AML, but providing all of the other services that we typically
want from our banks. Sorry, there are two different functions. One is to provide
some services, and the other is to hold and invest those deposits. The two can be
separated. What I want to stress, because I'm very frustrated by this, is that
today, when I deposit my money as Citigroup, I receive five basis points.
Citigroup turns around, deposit at the Fed and get 4 .9%.
Okay? So they gain 4 .85 basis points for just the privilege of being a bank.
If this is not subsidization, I don't know what it is. Well, you should go out and
find yourself another bank. I mean, I think what you were pointing out, which is
really important, is one of the ways banking has long worked is that it's relied on
a certain amount of, you can put it in more or less critical ways. One is
ignorance on the part of depositors. Another is a willingness to accept a lower rate
of return on deposits in exchange for a whole variety of services, including the
ability to go to an ATM, the ability to wire money, a bunch of fraud protection
services, which potentially can be quite significant. One of the interesting challenges
that has arisen more recently in Brazil is that faster payments have been really
great. And once people realize there are fast payments that were irreversible,
kidnappings, actually, with the requirement that you're then kind of passing money on
along really quickly became more of a challenge. And so there are reasons that we
actually have frictions in the payment system, and there are reasons that we have
some of these safety mechanisms built in, but you're certainly right. The structure
of the banking system does mean that during periods of relatively high interest in
particular, what you're going to get on those accounts is not going to match what
Citibank is getting in terms of interest on reserves that it has sitting at the
Fed, which is the reason I would expect you to have very little in your bank
account and a lot more in your money market mutual fund account, which is getting
something much closer to the current interest rate. If you were to craft an ideal
payment system, if we could start from scratch, rip these out and craft a payment
system that worked really well for merchants and consumers, what would it look like?
How would it look different than what we have today? It's a wonderful question. I
mean, I think you would have to start with a core question of, do we want the
payment system to be embedded in the banking system or not. Today, most credit is
extended outside of the banking system, but banks continue to be a cornerstone that
actually play an important role, stabilizing the provision of credit during good times
and bad times. And part of the reason they're able to do this is because folks
like Luigi leave their money and deposit and don't earn that much. And so there's a
tree that's being made in some ways with the banking system, where we're allowing
them to earn a little bit more on deposits. But in exchange,
we're asking them to play these various roles, both providing credit. And as we've
discussed, kind of monitoring activity in ways that actually might be suspicious. And
so I think there's the possibility of kind of revisiting that core agreement that
we've reached. And more importantly, if we're going to allow banks to do it, I
think, do we have affirmative service obligations to make sure that everybody has
access to a bank account? So we've seen a significant decline in the unbanked and
the underbanked, but it's not at zero. So one might be just create a whole new
payment system. The other would be leave the banking system in place, but put more
affirmative obligations on banks to actually provide bank accounts to all comers. You
stated beautifully. I think you're a candidate to become the next Fed chairman or
governor because the trade -off is not between my laziness and the bank's stability
because if that was the case, I would be very happy to trade off my laziness for
the bank's stability. The trade -off is between unsophisticated people that get screwed
to use a technical term and the stability of the banking sector. So we have a
system where the Fed, by design, defends the stability of the banking sector,
de facto sort of screwing the unsophisticated depositors.
From a social point of view, I find this unacceptable, but it seems that everybody
at the Fed seems to be very comfortable in doing that, which I find very strange.
First of all, I don't think it's specific to the Fed or specific to the United
States, which is part of what's striking. It is, I think, a core challenge, but I
wouldn't say it's just about sophisticated versus unsophisticated. It is really a
question of what are the values that people think that they're getting from a bank
account. And that's changing over time, right? For a long time, we had community
banks everywhere. And those banks played a really important role with depositors, but
also really supporting growth in their communities. They did more small business
lending. We know that they still do more small business lending. More of that small
business lending is relationship lending, which really promotes a certain type of
economic development. But we're shifting to a very different banking system that's
becoming much more transactional and is more dominated by the biggest players. And
there, I think we do have to scrutinize far more closely whether this is a trade
-off we want to continue making or other ways to kind of revive a banking structure
where it is more relationship -based, where there's actually community building and
credit provisioning in ways that we particularly value that we're getting out of the
structural trade -off that we're making.
- If you're enjoying the discussions Luigi and I are having on this show, there's
another University of Chicago podcast network show you should also check out. It's
called Not Another Politics Podcast. Not Another Politics Podcast provides a fresh
perspective on the biggest political stories. It's not told through opinions and
anecdotes, but rather through rigorous scholarship, massive data sets, and a deep
knowledge of theory. So if you want to understand the political science behind the
political headlines, then listen to Not Another Politics Podcast, part of the
University of Chicago podcast network. Hi, it's Bethany from Capital Isn't. Luigi and
I have something really exciting coming up. On October 30th, we're sitting down for
a live conversation with world -renowned historian Sir Neil Ferguson. It'll be right
before the U .S. election. We'll talk about the future of global politics and global
population declines in the next century. You can catch it all in an upcoming episode
of Capitalism. But if you want to join us for the live recording, be sure to
register. Head to our website, capitalisnt .com, subscribe to Capital Isnt and mark
your calendars October 30th, 11 a .m. Central for our live recording with Sir Neil
Ferguson. See you there.
Luigi, I thought one of the things you were trying to get at in the conversation
with Catherine is something we talked about in our introduction, which is, for lack
of a better way of putting it, the difference between a result versus a result that
actually accomplishes something. How do you think about that in this case? Did
anything Catherine say make you think about this any differently? Is this a case
that's worth doing even if the result is not actually beneficial to consumers or
merchants or financial institutions? Is it just worth doing on the merits of Visa's
monopoly alone, assuming the government's facts are right or is it a case that
should only be brought if the remedies can actually fix something? As you know, as
I get older I become more cynical and I think that the biggest advantage, the
biggest benefits of most antitrust cases is not remedy but is the process because if
they get to get discovery we find out a lot of juicy emails that really nail the
case. And this is very important also for us economists because we always look in
the dark, etc. But you know when you have the emails that say this is an
existential threat, they're becoming our friend, and this is, these are fantastic.
Warn it to everybody, never write anything in an email because everything that you
had in an email is discoverable and at this point you must sort of not pass the
IQ test if you write something like this. So at the very minimum, they should be
convicted for sheer stupidity of writing this on an email. The second thing which is
more important is that actually once a company is under somewhat scrutiny of the DOJ
of the FTC, they start to behave much better. Okay, so it's a bit like remember
the elementary school teachers say I'm watching you And then all of a sudden the
boy that is always misbehaving always had to start to behave a little bit better
because he knows that the teacher is looking at him all the time and basically an
antitrust case is like this and The convenience to mental in allowing competition
percent is the the Microsoft antitrust case the remedy was a Nothing burger basically
not nothing was done very little was done and nothing effective was done. However,
because they was under this enormous pressure, Microsoft found it more difficult to
monopolize the internet as they wanted, including creating Google. So if Google
exists, it's thanks to the antitrust suit. - What happened with Microsoft is an
interesting lens to see this through, because I'm actually unresolved on that aspect
of the Microsoft case. It clearly changed Microsoft's behavior. And it clearly,
because it changed Microsoft's behavior, it probably did open the door for companies
like Google to exist. But because it changed Microsoft's behavior, it also resulted
in the growth of an enormous legal bureaucracy at Microsoft and the loss of a
certain degree of confidence and really a lost decade or almost a lost decade and a
half for Microsoft as a company where it struggled to find its footing again after
that. So is it necessarily a good thing that it changes the company's behavior?
The bureaucratization of Microsoft, I'm not so sure you can attribute to the
antitrust case. I think that, you know, it's easier to look perfect if you don't
face competition. The moment you face competition, then you see all the problems. If
you're saying that the antitrust case generated an enormous amount of return to
lobbying and increased lobbying in Washington, et cetera, as our previous episode
demonstrates. I think that you're absolutely right. So I will see as a societal cost
more the increased lobbying as a result. So one of the things that Google learn is
you have to start lobbying from day one. Now even startups have a lobbying
department, which is kind I wanted because in the old days was not the case. So I
think that I see that as a major cost. The other one much less so. - I thought
the broader aspects of our conversation with her were really, really interesting too.
I liked her idea that antitrust, I think it's easy to become for the person with a
hammer, everything is a nail, isn't that the old saying? And I think it's easy if
you see things through the lens of antitrust to think that the remedy for everything
is an antitrust lawsuit. And I liked her idea that that was just one part of the
panoply of options or just one aspect of how to think about this.
Do you agree with that? I agree with that 100%. What happens to disagree with her
is the solution. I think she's much more reluctant in going for a Fed -led solution
to payment, then I would have expected her explanation, her privacy explanation didn't
do it for you. No, to be honest, again, maybe because I'm cynical, maybe because
I'm Italian or maybe because of both, but I assume that anything that a company
has, the government can get tomorrow. So if Visa has some Compromising details of
something that I've done wrong and President Trump wants to extract them from visa.
He's going to find a lot of ways to extract from visa in a way that I'm not even
aware. I feel better protected in terms of privacy if there is a government agency
with a particular mandate and some particular rules and maybe you give the
chairmanship of that agency to the opposition party or something like this. And then
I think that some government -based solution to protect my identity is much safer in
my view that relies on profit motives. The profit motive is to sell me at the
highest bidder. You know, I like that idea in a much broader way that perhaps the
leadership of every regulatory agency should be put in the hands of somebody who is
in the opposite party of the one and power. I think that would be a really nice
addition to the Constitution, actually. But back to that note,
you know, it's funny, I have a little more skepticism of the Fed than you do or
of a Fed -led payment system. And I think part of that is at times,
hypocritical resistance to the idea of the government as part of our business life
and this sort of antiquated idea, or idea that was never true, that the two should
be separate when in reality they are not separate. But I remember dealing with this
when I wrote about Fannie Mae years and years ago back in 2004, and it struck me
as insane that the government was as involved in the housing market as it was
through its effective sponsorship of Fannie Mae and Freddie Mac and this unofficial
guarantee that existed, which was the strangest concept in the world to me at the
time, but I've subsequently realized that much of our financial system in particular
does work in exactly the same way, whether it's the government backstop of the
banking system or the Fed's involvement now in financial markets. But I still can't
help this resistance to the idea of the Fed taking over the payment system. Does
that make sense to you? Am I articulating this well? Actually, yes and no, Because
on the one hand, I'm 100 % with you on Fannie and Freddie. I think that probably
we are the two people in America who hate Fannie and Freddie the most. So you
cannot find a bigger supporter of this idea than myself. However,
remember, this is the function that can be done by the private sector. In case of
payment, you have to realize that the government has been in the business of payment
at least since 1913, probably even earlier than that, through the so -called cash,
right? The Fed is providing cash. The only business that even Milton Friedman wanted
to be controlled by the government was the Fed, okay? Because there was a debate
between him and Hayek. Hayek believed in private money and Milton Friedman said no,
money should belong to the government. And why? Because actually, number one, there
is a gigantic necklace tonality. Number two, there is a seniority involved so that
you get money out of basically providing the service for doing nothing. And this is
the closest thing to a free lunch. And that is belongs to the government not
belongs to the private sector. And that's the reason why I see as a threat,
all these stable coins, because all these stable coins are really eating up part of
the scenery of the Fed and part of the scenery of the banks and I'm coming to the
scenery of the bank but the idea that payment should be done by the government is
not a new idea. I am a big supporter of that even if I think the government
should be out of everything else except defense. I'm exaggerating a bit but just to
say the point. Go back to your first point you said there was there were two
things there was a giant externality, and then there was the seniority. I understand
the concept of the seniority, but I don't understand what did you mean by the
externality? Oh, there is a net externality that you want to use the same method of
payment as I do. And so we naturally converge to the same platform.
Now, naturally, in this situation, if there is only one, that one tends to be a
monopoly. Okay. And with the problems come with monopoly. That's a Now, another
reason to have the government involved, because if you cannot have a private
competitive solution, I think that the lesser evil is a government monopoly rather
than the private monopoly, because the private monopoly tries to extract all the
surplus from the customers and taking all the profits to a few people.
So, from a redistributional point of view is as very negative aspects.
We didn't have time with Catherine to go into that. There is an aspect which is
less important with debit card, but much more important with credit card, is that
there is a pretty adverse redistributional effect. It's exactly like the real estate
brokers, sorry for my obsession, they basically rebate or they give a gift to the
buyer by not charging anything anything out of pocket. In the visa,
you get a rebate that are the miles. Part of the cost of that mile is paid by
the merchant through the discount. But part of the cost of that mile is paid by
the people who use cash. I saw some estimates that basically every cash user
subsidized to the extent of $700 a year credit card users under the assumption that
prices are the same when I go and buy my Starbucks coffee,
I can pay cash or I can pay with a credit card. I can also pay with a Starbucks
app, but that's a different story Let's say that I pay with a visa. Okay, so I
pay the same cost to the extent that they make up for part of the influence by
charging a bit higher prices to everybody. If the price charges the same and imagine
that they need to reach a profit target or need to survive, there is some
constraint, then they need to increase all the prices. I get the same price.
Suppose that I pay with the credit card and you pay with cash, we both get the
same price, but I get the the mires as rebate, okay?
And so, because the buyers don't come from heaven, they're cost, you end up paying
for that, okay? So, you cash buyer are subsidizing me credit card owner.
And the people who own credit card tend to be richer, and the people who own cash
tend to be poor. So, this is Robin Hood, the opposite you should call it the the
sheriff of Nottingham because it's really charging the poor to give to the rich.
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