Capitalisn't

Visa's Hidden Tax on Americans

Episode Summary

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

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.

Episode Transcription

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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