How Small Businesses Exploited Wal-Mart

When I was home for fall break, I discussed the recent debit card fee regulation with my father (who works for the Star debit network). This NY times article explains the regulation that will allow the Federal Reserve Bank to set the fees debit card companies charge merchants. Merchants will benefit from the lower fees (and maybe consumers, but that remains to be seen), while Visa and MasterCard will receive lower profits. Additionally, cards issued by big banks with at least $10 billion in assets are the only ones affected by the legislation. Visa and MasterCard give banks 80% of the merchant fees, and so this is also a heavy blow to the banking industry. The Federal Reserve Bank has not yet enacted the new fees, and so the full effect of the regulation on retailers, consumers, big banks, and debit card companies remains to be seen.

Major retailers such as Wal-Mart and Amazon heavily lobbied for this regulation. This is a clear example of Olson’s “privileged” group, where a few members had an incentive to bear the entire cost of obtaining a collective good. The major retailers paid the cost for lobbying the regulation, knowing they had much to gain. On the other hand, small businesses that accept debit cards now also reap the benefits of the regulation without any of the cost. The small businesses had no individual incentive to bear the cost of lobbying, and so they acted as free riders while Wal-Mart and Amazon paid all the costs. It happens rarely that one can say that small businesses exploited Wal-Mart.