WASHINGTON — The staff of the Federal Reserve failed when they did not thoroughly analyze the impact of a proposed regulation on the debit interchange cap on consumers and the economy at large, according to a leading economist.
Richard Schmalensee, a longtime economist at the Massachusetts Institute of Technology and a former member of the President's Council of Economic Advisers in the Clinton Administration, told attendees at a Payments.com interchange conference that it is “fairly easy” to use basic economics to determine the impacts of a debit interchange cap on consumers or the economy as a whole and hinted that the Federal Reserve's staff should have done more of that analysis.
Schmalensee walked the attendees through what he called a basic economic analysis of the debit interchange cap impacts, contending that the economics and economic histories suggest that banks will pass the loss of income from debit cards fairly quickly through to consumers, since it is both a big hit to their income and they are in a particularly competitive industry. The economics suggest, by contrast, that merchants will not pass through their interchange savings quickly and fully. Some merchants, particularly those with very competitive products or product areas like movie theaters, supermarkets and some other areas may pass the savings on, but not all and not all the way, he argued. The economic consequences, he told the meeting, are not hidden or impossible to understand.