BYCIG Free Market Series Part Two
The BYCIG Free Market Series is a BYCIG series of posts that are centered around a central concept — free markets and competition in the United States economy. The common topic for these Free Market Series reports is going to be FTC and DOJ updates concerning antitrust litigation. Our thoughts, beliefs, and questions about these topics will all be laid out in the following articles.
Fun fact: In the late 1990s, during an antitrust lawsuit, Microsoft argued that it couldn’t be a monopoly because “everyone uses our product”—which is the very definition of a monopoly! The irony wasn’t lost on anyone, and the case led to significant changes in how Microsoft did business.
Professor Sarkisyan On Payment Technology’s Role in Transforming Finance and Banking
New payment technologies have been a major talking point for investors and bankers around the world, and its relation to profound changes in bank deposit markets and monetary policy. More specifically, innovative payment technologies like Zelle or Venmo can largely influence how central banks achieve their policy objectives, and how people store and use money.
The two founders and presidents of the BYCIG, Jasper Gould and Emile Chilingirian, recently met with Professor Sergey Sarkisyan, a well-respected finance professor from the Fisher College of Business in The Ohio State University. Professor Sarkisyan specializes in areas such as monetary policy, banking, deposit rates, and payment technologies.
Currently, the payment method that is dominating the market is credit cards issued by companies like MasterCard and Visa. The usage of credit cards entails a commission that is charged to your account. Banks have the most power when it comes to deposit rates and markets, and since there is an utter domination by credit cards, large banks pay a very low deposit rate because there aren’t really any real alternatives. Additionally, large banks don’t follow Fed reserve rates because they have no fear of competition in banking. With the introduction of new alternative payment methods such as Apple Pay and Cash App, banks have new competition, as digital banking alternatives would pressure the large banks to follow the interest rates, and this would lead to more efficiency and tracking in the banking rates. This increased competition would also force banks to innovate and adopt more customer-centric technologies. Peoples increase usage in mobile payment apps and non-bank affiliated platmors diverts deposits away from traditional banks, challenging its ability to attract and retain deposits, a key funding source for lending activities.
Professor Sarkisyan also touched on what he thinks of Central Bank Digital Currency (CBDC) as another alternative platform to increase competition in the deposit rate market. With the CBDC being a very government controlled alternative, he believes that mobile payment systems are a better substitute, as CBDC would create a less free market, and many privacy concerns may arise through the potential for the government to easily erode privacy and create a nation where financial behavior is constantly tracked, raising issues around personal freedoms and data security. Central bank digital currency would also greatly hurt banks because people take their business from banks to central bank digital currencies and banks would be shut out almost completely, while mobile wallets and payment systems would lead to efficient competition.
Visa and MasterCard: Financial Giants or Unchecked Monopoly?
The final topics discussed in our meeting with Professor Sarkisyan were more specific to the credit card market; Visa and Mastercards unusually tight grip on the industry, and Sarkisyan’s unconventional solution. When making a payment with a credit card, merchants will have to pay more than 2 percent fee to the originating bank, and companies like Visa and Mastercard upcharge the fees to 4 percent. Merchants then have no choice but to accept either credit card network. Merchants are allowed to include the 2 percent fee in the charge to the consumer to cover the cost of the repayment to the original bank. This entails that part of the cost goes to Visa and Mastercard, and these companies are making hundreds of billions of dollars off of a simple cost coverage, and this is considered a monopolization fee. Though unlike most monopolies, taking for example Google’s recent altercation with the DOJ, increasing competition of the product would not actually solve the monopoly problem in the credit card market, and this is because of credit card benefits. If more companies were involved to have more competition in the market, all companies would battle to have the best benefits, which is the primary incentive for the customers in the market. As the credit card benefits go up, the fees will also go up to cover for the benefits. The current solution that Professor Sarkisyan suggested was once again the introduction of mobile wallets and payment methods. These payment methods would be the only way for there to be adequate competition. This alternative would not fully kill off the companies MasterCard and Visa, and this is not the intention. It would simply cut off monopoly profits that those companies are making, which would benefit consumers by offering cheaper alternatives that challenge the expensive credit card companies, and it would foster innovation in the industry.
Check in on the BYCIG website to read the next BYCIG Free Markets article which will cover more free market topics and notable antitrust cases going on right now. We want to thank Professor Sarkisyan for his support and time, and we hope you enjoyed the article.