Policy and Politics of Payment Systems

Abstract Central banks do more than set monetary policy. They also make and enforce regulations that correct real or perceived market failures. Like macroeconomic policies, these microeconomic policies also often have important distributive consequences. Central bank performance in regulating financial services is highly variable, however, with poor performance often causing finance-led inequality. This chapter illustrates these points through a case study on the comparative regulation of plastic payment methods in the United States and Australia. Plastic card transaction fees cost six times as much in the United States as they do in Australia, in large part because of the relative stringency of Australian plastic card regulation. In both nations, central banks are the regulators responsible for controlling these financial transaction costs. Building upon Jacobs and King’s framework, this chapter considers the role of institutions, culture, and interest group coalitions in explaining differences between the central bank policy regimes. While these all emerge as important factors, the most critical difference between the two countries is the laissez-faire approach to stakeholder engagement through rulemaking found in the United States, and the far more intentional, quasi-corporatist approach adopted by the Reserve Bank of Australia. The analysis identifies procedures and practices for assimilating public preferences as critical institutions for the regulatory policymaking of central banks, and also challenges the deck-stacking hypothesis popularized by the structure-and-process school.