Felix Salmon has responded to my concerns about whether or not the proposed financial regulation will reduce the likelihood that future disruptive technologies will emerge and present a competitive challenge to the Visa/Mastercard duopoly. I don’t find his case particularly convincing, and certainly not convincing enough to overcome the substantial burden of proof that should be required when we’re discussing regulation that could impede innovation and competition.

Felix has several disagreements with me. First, he says, we don’t necessarily want a competitive or innovative solution to high interchange rates if that means injecting a lot more instability into the financial system. Agreed. Not every competitive solution would be a good solution.

He sees the best possible innovative solution to be mobile payments, but sees them as unlikely because a) they’re mostly used in under-banked developing economies, b) phone companies won’t want to do it, and c) regulatory barriers would prevent it.

To points a) and b) I would point to the examples of Japan, South Korea, and Finland, all of which have significant mobile payment systems in place. The Japanese mobile payment industry evolved mostly at the work of the telecoms, none of which are monopolies. In South Korea, the telecoms were first movers but financial institutions soon took over.  This paper from the Kansas City Fed has more history and details. Given this evidence, I’m not sure how one could conclude with any degree of confidence that the future development of U.S. mobile payments is unlikely or predictable.

To point c), if he’s correct and regulation is what would prevent mobile payments, then shouldn’t we be pushing to eliminate whatever barriers are in the way? Does Felix really think mobile payment systems present such a threat to the financial system that they should be prevented? And aren’t the minor odds there worth the tradeoff of potentially weakening the Visa/Mastercard duopoly?

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