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Net Neutrality, the Internet & Electronic Funds Transfer Networks

By 17 December 2010 3 Comments

Public policy issues tend to get siloed, which means that net neutrality geeks and financial services geeks dwell in separate worlds.

Still, I have an interest in payment networks because of work outside of Digital Society, and in viewing the webcast of yesterday’s Federal Reserve Board meeting on its proposed rule to implement the Durbin Amendment section of the recent Financial Reform Bill, some core similarities between that issue and the ongoing debates over the FCC and net neutrality were striking. (The session is now off-line, but the proposed FRB rule and the back-up staff memo are here.)

The Durbin Amendment requires that the FRB control the prices of “interchange fees” for debit cards, which is one of the charges levied in the complex system of electronic funds transfer. These fees are to be proportional to the incremental costs of providing the service, with no allowance for either general corporate or system overhead costs. The law also requires a kind of neutrality – when a debit card is used, the merchant must be given a choice of more than one payment network over which the transaction will be channeled

In the context of the Internet, net neutrality, of course, means the amorphous doctrine that all devices, packets, and services must receive equal treatment.

So whence my sense of déjà vu? Let me count the ways.

(1)    Both the Internet and the EFT system are complex networks that have grown explosively over the past decade through the private actions of thousands of participants that have relied on private negotiation and contract. In each case, the lack of detailed government directives has been an important factor in this growth, because it has allowed for flexibility, use of local knowledge, and rapid adaptation in response to developments and problems. The metaphor of an ecosystem is often used, and it has considerable validity. Both are awesome demonstrations of the adaptive power of free markets.

(2)   In each case, the impetus for regulatory interference is coming from rent-seekers – institutional and corporate interests that are unhappy with what this creative private process is giving them and that want the government to stick a thumb on the scales.

For the Internet, the net neutrality advocates are an alliance of the Free Press and its allies, who are basically opposed to a market-based system of telecommunications, and corporate interests who want to make bandwidth into a commodity so they can capture more of the total value of the system. The corporate interests also understand that net neutrality will advantage them over smaller players – a giant can afford private fiber and content delivery systems, and net neutrality will prevent smaller competitors from contracting with carriers for equivalent services.

For the EFT networks, the regulatory advocates are large retailers who want to reduce their payments to the debit card companies. They must also understand that damage to the EFT system will give them (the big guys) an advantage over smaller  competitors because the big guys can afford to run separate payment platforms and the small cannot. The small guys do not seem to have tumbled to this, and think the big retailers are their friends. The similarity to the net neutrality situation is striking.

(3)     In each case, the public policy rationale that supposedly justifies the action is exceedingly thin, which is not surprising, since each is an effort to ensconce cronyist favoritism. The Durbin proposals depend on such myths as the assumption that bad check risk is zero, while net neutrality proponents remain in a world of abstraction, unable to find real world problems that would justify the intervention.

(4)    In each case, those who advocate the regulation have no idea what the impact on the system will be. In the FRB meeting, for example, the staff responded to a series of queries about impacts with the response “we don’t know.”  In the net neutrality context, the fact that the proponents cannot even define net neutrality says all that need be said about their predictive abilities.

(5)    Each of these regulatory interventions creates risk of serious harm to consumers. We rely on telecom carriers to protect us against spam, viruses, and privacy attacks, which requires that they be able to manage their networks with speed and discretion. How can they do so if  they are subject to a series of vague mother-may-I requirements from the FCC?  The EFTs are a major bulwark against online theft; how can they fulfill this role if they cannot control the payment network used, if the customer does not even know that his transaction may be routed over some fly-by-night, and if the costs of anti-fraud measures cannot be recaptured?  (The FRB is supposed to allow recapture of the costs of preventing fraud, but it has not a clue as to how to do this, and in any event why should a merchant route a transaction over a secure but higher cost network as opposed to a cheaper but insecure one if it does not bear the cost of error?)

(6)  Advocates of each proposal are clueless about the interaction of their desires with the growth of mobile networks. In the case of the Internet, the best any neutrality proponent can do is say, “wireless, too,” without even the pretense of the rationale that attaches to wireline services. The Durbin proponents haven’t thought at all about the possible impact on the nascent mobile device payment systems.

It makes one long for the good old days, when crony capitalism meant an earmark or a contract, which just wastes a bit of money. Now, cronyism has come to mean ignorant intervention into vital and complex systems for the sake of some minor advantage for the politically connected, and with disregard for the impact on creative private systems that have been evolving rapidly and to the great benefit of all.


  • Garrett said:


    All your statement imply a legitimate competitive marketplace. With both PCI and ISP’s there is at best duopolies in the market.

    The actions these agencies are taking are simply balancing acts to account for the lack of true competition within these markets.

    Please acknowledge that free markets only work when there are markets. I don’t really have a choice with either of these industries… You know better and shouldn’t be forgetting this key fact.

    Very Respectfully,
    Garrett Heaton

  • Digital Society » Blog Archive » More Hill Hearings: Payment Systems said:

    […] connections between this regulation and regulations of other networks, such as Net Neutrality (see Net Neutrality, the Internet & Electronic Funds Transfer Networks); (2) The effect of this or other regulations of payment systems on the development of new […]

  • Digital Society » Blog Archive » Mobile Payments & the Durbin Amendment said:

    […] but Durbin is interested in you.” And is difficult to convey to anyone not steeped in this issue just how appalling is the FRB proposal, as, indeed, is compelled by the […]