Does interchange regulation actually constrain what merchants can extract

I'd push back a bit on the fragmentation story, at least as the primary driver. US retail is actually pretty concentrated—you've got Walmart, Target, Kroger, Amazon, etc. That's not fragmented. The real issue is that credit card interchange works differently than debit because the value proposition to merchants is genuinely murkier, and that matters for coordination. With Durbin and debit, the case for resistance was clean: you're paying a fee for something with minimal fraud risk and minimal consumer value-add. Merchants could coordinate around "this is pure rent extraction." Credit card interchange is messier. Merchants do get something—fraud protection, chargeback resolution, dispute handling, the fact that cardholders spend more because they're on credit. Whether that's *worth* 2.5% is the fight, but it's not obviously frivolous the way debit fees are. That makes it harder to build a coalition that says "we're just refusing this." The EU case is interesting but I'm not sure it actually proves regulatory power was the main variable. EU merchants coordinated differently, but they were also operating in a regulatory environment where capping interchange was already politically viable—which suggests the underlying coalition and merchant sentiment was already there, not that regulation created it. The causality might run the other way. I don't have a study to point to, so I'm genuinely uncertain here, but I'd want to see someone compare merchant pressure on networks *before* and *after* EU regulation hit, not just assume the regulation did the work.

You're right to suspect the standard narrative needs complicating, though I'd push back slightly on where the merchant fragmentation point lands. The Durbin comparison is sharper than it first appears. Debit got capped because it hit a specific political moment—post-2008, there was real appetite to constrain financial sector rents, and debit touched smaller merchants' pain points directly. But credit card interchange had already calcified into the business model by then. By 2010, the ecosystem was too settled. Merchants had already made pricing decisions *around* those fees. Grocery margins already baked in swipe costs. You can't coordinate defection once you've reorganized your entire supply chain to absorb the tax. The EU angle is trickier though. I'd be cautious about inferring their regulation "worked" without asking what they regulated into existence instead. The 0.3% cap is real, but European merchants also got: slower payment settlement, weaker fraud protections initially, and less investment in card infrastructure—which may have just moved costs elsewhere (or suppressed the digital economy in ways harder to measure). The US kept higher interchange but also kept the incentives that built out better networks and faster settlement. Your core insight stands though: you need to explain *why* EU merchants coordinated and US ones didn't, not assume regulation alone made the difference. That's a much harder question about bargaining power, industry structure, and institutional capacity. The regulation probably mattered at the margins, but yes, you're likely missing something about the upstream political economy of how each side organized its merchant class differently.

The Durbin comparison is good, but you're underselling what happened after the cap. Debit interchange fell from ~1.1% to 0.24% almost immediately—that's not merchants coordinating better, it's regulation actually biting. And yes, grocery chains coordinated around it, but the regulation did the heavy lifting. Without it, they'd have negotiated down maybe 20-30% based on prior leverage. For credit cards in the US, you're right that merchant coordination matters. But the EU data point cuts against your "merchants just don't defect" theory. EU merchants are *also* fragmented—you've got the same mix of large chains and small retailers. The difference is the regulation removed the coordination problem entirely. Once it's a legal ceiling, every merchant gets the benefit whether they coordinate or not. You don't need grocery chains threatening to drop Visa; you just need a law. That's the actual mechanism. The fraud loss argument is real but overstated for why the gap persists. Fraud *was* higher historically in the US, but networks have largely built that into their risk models and could absorb modest reductions. What's actually different is that credit card lobbying in the US has been stronger and more durable than in the EU (financial sector regulation generally is more lax here). It's less that merchants can't coordinate and more that the political coalition required to pass a cap doesn't exist. Worth asking why that coalition succeeded for debit and failed for credit—might tell you more than merchant fragmentation alone.

This is sharper than the standard regulation-works narrative, but I think you're conflating two different things and it's worth separating them. Yes, merchant coordination matters enormously—that's well-established. But the EU merchants also *had* fragmentation problems, and the regulation happened *because* coordination was failing. So why'd they get regulation and US didn't? The honest answer is probably just politics and path dependency. The EU was building a single market in the 2000s-2010s, payment systems were a legitimate friction point, and there was political will to intervene. US merchants lobbied too—the Durbin fight happened—but credit cards have different constituencies than debit, and the networks had better PR cover (fraud risk, innovation costs). That's not a deep mechanistic story, it's just how power worked out. But here's what I'd actually push back on: are you sure US merchants *couldn't* have coordinated? The grocery chains that moved on Durbin—why not credit? Was it genuinely about collective action problems, or did they actually think the fees were justified by the payment volume and customer loyalty cards generated? Because if it's the latter, that's not evidence regulation was unnecessary in the EU either. It just means the bargaining positions were different enough that regulation became the lever. Have you looked at what the actual merchant coalitions were saying in the 2000s when interchange was being debated in Brussels vs. DC?