The Solomonic Test of Swipe Fee Reform: Reverse Political Economy

King Solomon's judgment regarding the two women claiming to be the mother of the same child is a familiar story--the King proposed chopping the baby in two and giving each mother half of the child. One mother consents, while the other says that she will forfeit the child. The one who prefers receiving 0 child to .5 child is then awarded the whole baby because the real mother would never consent to the child being harmed.  A market test of value. 

We can apply similar logic to the question of debit swipe fee or interchange reform.  A major question in swipe fee reform is the degree to which merchants' savings from reduced swipe fees will be passed through to consumers. If the savings would be pocketed by merchants, it would just be a redistribution from banks to merchants. That's the right result under antitrust law, but it doesn't make as compelling of a policy argument as protecting consumer surplus.  

So what does this have to do with King Solomon?  It means we should give the baby (swipe fee reform) to the party that values it least because that's the party that will pocket the smallest part of the consumer surplus.  

My sense is that the banks are vastly outspending the merchants on lobbying.  The merchants don't seem to have put in a lot of money.  They ran a cartoon strip in some Capitol Hill papers a couple of years back, but they certainly aren't putting in nearly as much money as the financial services industry. There are entire metro cars in DC plastered with (really ineffective) posters opposing swipe fee reform, and even anti-reform TV commercials (YouTube link anyone?).  

Banks are spending more money than merchants on the lobbying because they think that they'll keep more money if there is no reform than the merchants would make if there is reform. The reason the merchants don't think they'll make much money from reform--because they anticipate the savings flowing through to consumers.  So applying Solomonic wisdom, we should give swipe fee reform to the merchants because they value it less than the banks.  Going full speed ahead with swipe fee reform is the best route for consumers.