Peter Guidi\'s Blog

Posts Tagged ‘decoupled’

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Orwellian market principals; is legislation regulating interchange fees a harbinger of greater merchant acceptance of government control over industry?

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, payment, Payment card on March 10, 2010 at 6:59 pm

Close on the heels of Barney Frank’s decision not to pursue HR 2382, and as the industry plots its next step, merchants might want to consider the words of Canada’s Finance Minister Jim Flaherty. The Finance Minister is quoted as saying; “(he) would exercise the new powers (sic. impose card use fees) if the industry failed to comply with a proposed VOLUNTARY code of conduct. Merchants’ should ask themselves if this is the type of government intervention that is appropriate in the United States? Merchants might ask if they are opening the chicken coop to the wolf. If the government can regulate interchange fees, what else could they control? More importantly; who will determine what a “fair price” is and will merchants be pleased with a “regulated result”?  What if the Government chooses to raise fees rather than lower fees?

One way to evaluate this question is to consider how merchants feel about interchange fees in countries with government regulation? I read a blog about one consumer’s experience with credit card fees in New Zealand and Australia. He reports that most merchants specifically asked if he wanted to pay using signature or PIN? One restaurant is reported to have a sign stating “$15 min.” explaining that credit card fees were too high to allow purchases under $15 using a credit card. Imagine that? Even with card fees at 0.55%, merchants reported interchange fees are too high.

The current political environment is ripe for all sorts of government intervention. Government sponsored higher interchange fees are possible, particularly if interchange is seen a source of tax revenue. The merchant community could find that advocating interchange regulation might lend support to adverse government action in areas like Motor Fuels, Tobacco, Labor and Healthcare and other issues where they seek less, not more, government involvement.

(http://www.linkedin.com/in/peterguidi)

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Credit Card acceptance costs expected to increase by summer 2010; is your pool of profit going down the drain?

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, payment, Payment card, Uncategorized on February 23, 2010 at 6:16 pm

David Mamet said “The surprise is half the battle. Many things are half the battle, losing is half the battle. Let’s think about what’s the whole battle.”

According to NACS, in 2008, convenience stores sold approximately $414 billion in gasoline sales with the average store selling 118,526 gallons per month. On Monday, (2/23/2010) Yahoo reported the national average for the price of gas at $2.68 per gallon up $.73.1 cents from the same time last year. Fred Rozell, Retail Pricing Director at Oil Price Information Service, is predicting a high of $3.25 for this summer. If Fred is correct, then the retail price on gasoline will have increased $1.33 cents per gallon from the summer of 2009. If that isn’t painful enough, look at the corresponding increase in credit card fees of a little over three cents ($.033) per gallon. 

Cause/effect: If Fred is correct, the average retailer will pay an additional four thousand dollars ($4,000!) in card acceptance costs totaling nearly $9630.009 per month this summer. The impact of these increases will significantly reduce margins on gasoline sales. Is there any doubt this is happening? A quick look at the gasoline balance sheet at $2.65 per gallon shows that retailers are already half way there! 

Where’s the surprise? This summer won’t likely be as painful to the retailer’s pocketbook as the summer of 2005. The difference?; Total demand remains low as the economy continues to suffer while people keep their cars, boat’s and RV’s in the driveway. Without a big increase in demand it’s unlikely that prices will reach the $4.00 range. Reflecting back just a few years ago to when retailers experienced this trend and eventually saw profits disappear the call for change was sounded. 

Robert Shapiro, author of “The Costs of “Charging It” in America: Assessing the Economic Impact of Interchange Fees for Credit Card and Debit Card Transactions” correctly identifies the “Whole Battle” when he says, “credit companies and banks compete with each other by offering large rewards that are financed by fees”, “The competition is driving fees up rather than driving fees down.” 

The Whole Battle is asking how the retailer can compete with Financial Institutions for the consumers “Method of Payment”. This summer will mark another battle won or lost, how will you fight back?

(http://www.linkedin.com/in/peterguidi)

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What is Alternative Payment?

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, payment, Payment card on February 15, 2010 at 6:33 pm

The payments landscape is constantly changing with new technology and applications regularly emerging trumpeted as the latest and greatest “Alternative Payment” system. With all of this change it might be helpful if we define “Alternative Payment”. Perhaps the challenge is to define “Traditional Payment” and say that everything else is Alternative Payment, but somehow that does not satisfy the question. 

There are a two ways to look at this question; the practical application and the academic question. Practically speaking, in the current payment landscape any payment system that eliminates card associations from the transaction is an alternative system. Academically, the question is more complicated and reaches to the Financial Institution. To satisfy both the practical and academic definitions, “Alternative Payment” could be defined as: payment methods that do not adhere to the issuer-network-acquirer model and those that do not utilize card association networks or, where the liability of payment is held by an issuer that is different than the FI holding the consumers “dda”.

Do “E-Wallets” qualify? What about merchant issued debit cards? ACH Decoupled Debit is an example of an “alternative payment system”, but does it meet the criteria? The result of an ACH decoupled debit transaction is the disintermediation of the Financial Institution holding the consumers dda from the card based transaction. What if we consider EFT networks, or the ACH to be a part of the FI, then where do we draw the line? Perhaps any payment where the consumer does not directly enter their credit/debit card number at check-out qualifies as an “alternative payment”. Google Checkout or PayPal transactions that are funded by a Credit Card do not appear to be “alternative payment. National Payment Card, BillMeLater and eBillMe clearly consider themselves alternative payment. What is Alternative Payment? What do you think?

(http://www.linkedin.com/in/peterguidi)

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Understanding the ROI of Merchant Funded Rewards: Is a price roll-back a margin killer or profit generator?

In alternative payment, credit card, debit card, interchange, loyalty, payment, Payment card, Uncategorized on December 16, 2009 at 8:40 pm

Merchant funded rewards drive significant increases in key metrics across the full customer lifecycle.  Merchant driven programs can drive a substantial return by delivering significant increases in key metrics from consumer acquisition to engagement and retention driving higher customer lifetime value.

Convenience/Petroleum retailers are well positioned to leverage merchant funded reward programs based on price roll back and funded through the allotment of interchange fees to consumer rewards through the introduction of alternative payment. ROI from these programs comes almost exclusively from the value members see in the program. Numerous studies demonstrate that consumers will make decisions on where to shop for gas with just a few cents of difference. Funding price discounts on gas with no offsetting savings represents a significant percentage of margins, making these types of programs expensive and difficult to maintain. The introduction of alternative ACH payment to this schema allows the retailer to influence both the consumer’s purchasing and payment decisions when choosing price roll back that is based on payment type. The ROI is generated because the program drives up all key metrics. The result is that the retailer sells more gallons to the group of consumers in the program. Results indicate that 20% of the consumers engaged in this type of program will double the number of gallons purchased from the retailer. With effective implementation and ongoing execution of the program, Merchants can expect to see meaningful increases both in gross sales and margin as a result of merchant funded rewards based on price roll back at the pump. (http://www.linkedin.com/in/peterguidi)

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Passing on the savings: Do lower interchange fees mean lower retailer prices for the consumer?

In alternative payment, credit card, debit card, interchange, payment, Payment card, Uncategorized on December 9, 2009 at 7:49 pm

Oscar Wilde once said “There are many things that we would throw away if we were not afraid that others might pick them up”. The same may be true of interchange fees and margins.

This month the Competitive Enterprise Institute (CEI) published a report called “Payment Card Networks under Assault” which makes the case that capping interchange fees will hurt consumers, charities, community banks and credit unions. One of their primary claims is that retailers would not pass on savings from lower interchange fees to consumers. The CEI points to the GAO report which concluded that “consumers may not experience lower prices and retailers could pocket the entire windfall resulting from any reduction in interchange fees”.  Meanwhile, the Consumers for Competitive Choice (C4CC) called for interchange fee reform stating that reform would spur job growth, and as expressed by one President of a 90 store chain who is paying nearly 3.5 million dollars in interchange fees saying: “lower fees would mean lower costs for consumers”.

 Would a retailer pass on savings to consumers if interchange fees where lowered? Here’s another question: Will retailers use discounts to compete with credit card companies for the consumer’s method of payment? And if they do, what methods are available; price roll back for ACH or cash credit pricing? As the ball goes back and forth on this issue, both sides need to be cognizant that Congress is looking for solutions that benefit the consumer. Unless the retailers can demonstrate that they are willing to provide lower retail prices to consumers for less expensive forms of payment, why should Congress believe that consumers will benefit from a cap on interchange fees?  (http://www.linkedin.com/in/peterguidi)

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Understanding two-sided markets; the economics of payment card acceptance costs.

In alternative payment, credit card, debit card, interchange, payment, Payment card, Uncategorized on November 18, 2009 at 9:44 pm

The payment network/platform is a two-sided market that matches users from two different groups enabling them to do business; in this case, consumers carrying cards, and retailers accepting cards. Two-Sided Market theory models the pricing and demand of platform services which involve interactions between two distinct groups. Typically, two-sided markets have a “subsidy side” that is a high volume group of users who are valued by the “money side”, or the other user group.  In the retail industry these two groups are the merchants and consumers, where the merchant is the “money side” because they value the large group of consumers carrying payment cards. Two-Sided economics explains the allocation of prices between the two groups. The key ingredient is that at least one side of the platform needs to deeply care about the number of participants on the other side.

The goal of a platform operator (Visa/Mastercard) is to generate “cross-side” network effect. If a platform can attract enough users, the money-side will pay handsomely to reach them. This is what happens in the retailer industry with credit cards and why the interchange fee keeps going up.  Interchange does not represent or reflect any specific operational cost being incurred by the network; rather it is a reflection on the value that the retailer places on access to the card user. http://www.linkedin.com/in/peterguidi

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Waking the giant, retailers and merchant issued ACH decoupled debit cards.

In alternative payment, credit card, debit card, interchange, payment on October 29, 2009 at 4:32 pm

Theodore Bikel, who made his film debut in The African Queen, once said “All too often arrogance accompanies strength”. I suppose, he may have been speaking of Humphrey Bogart, but today, couldn’t we apply this to the constant drumbeat announcing the death of ACH Decoupled Debit from the nation’s Financial Institutions and analysts’?

Capital One’s shuttering of its decoupled debit card has raised the eyebrows of industry experts with ISO & Agent declaring; “Decoupled debit cards appear to be fading away”. Meanwhile, Javelin Strategy and Research declares; “Merchant-centric decoupled debit suffers disconnect between the merchants’ interests and their costumers”.

The Mercator Group may have it closer to true when they say “Decoupled debit is all about loyalty.”, and there lies the real disconnect. It’s not between the merchant and consumers interest, it’s between the merchant and financial institutes interest. When it comes to the consumer, we all agree that providing the best value is paramount, but who is best able to provide the consumer with the best value, the retailer at the point of purchase, or the financial institute through a method of payment? In the end, it all boils down to costs, rewards and the giant’s desire to wake. One has to wonder, if the high cost of interchange and financial institutes’ monopolistic practices have created enough discomfort to break the slumber? (http://www.linkedin.com/in/peterguidi)

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