Posts Tagged ‘two sided market’
ACH, ach. loyalty, alternative payment, Bank Tax, card networks, Convenience Stores, credit card fee, credit cards, debit cards, decoupled, Electronic Payments Coalition, federal Reserve, H.R. 2382, House Financial Services Committee, two sided market
In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, payment, Payment card on April 8, 2010 at 11:25 am
Most consumer payments involve some form of banking relationship. Mobile and other P2P payment providers like the newly launched “Square” offer the allure of disintermediation promising the end of the banks control over payment. But for now, retailers looking for lower transaction costs at the POS; the choices are limited, with most involving a card and all involving a financial institution (bank).
Retailers considering alternative payment need to under stand the “Demand-Side” of payments. Currently few retailers deal with the “demand-side” of payment; rather they deal with the “Supply-Side. The “Supply-Side” perspective of payments focuses on the network through which the payments are settled.
The Demand-Side of payment systems has to do with the choices consumers make when selecting a “Method of Payment”. For most convenience/petroleum retailers this means a sticker on the front door or pump announcing which payment cards are accepted. Other “Demand-Side” promotional opportunities come from major oil or co-branded cards. Banks (card issuers) understand the importance of the “Demand-Side” and focus their efforts on influencing the consumers’ Method of Payment. Competition for the consumer’s payment choice or the Demand-Side is influenced by the banks and networks through affinity & reward programs promoted through extensive advertising and marketing paid. Retailers support these programs through Interchange Fees.
In any two-sided market there are two groups of end users who need a “platform” to reach each other. In the case of payments, consumers with credit/debit card and retailers who want access to those consumer funds represent the two groups of End-Users. Their desire to reach each other is called a “network effect”. When banks focus on the ‘Demand-Side” of consumer payment choice by offering rewards, they are increasing the strength of the network effect. When Retailers focus on the supply side of the of consumer payment choice, accepting the cards and offering no alterative, they are adding to the strength of the network effect. The result of strong network effects is greater platform value resulting in higher fees.
Successfully launching alternative payment programs means that retailers will need to focus on both the supply and demand sides of consumer payment choice.http://www.linkedin.com/in/peterguidi
ACH, ach. loyalty, alternative payment, Bank Tax, colloquy, Convenience Stores, Electronic Payments Coalition, federal Reserve, House Financial Services Committee, interchange fee, loyalty, Mastercard, Merchants Payments Coalition, payment, payment choice, Signature Debit, two sided market
In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, payment, Payment card on March 30, 2010 at 11:52 am
Confluence is the act of flowing together; the junction of two or more bodies of water; the place of meeting. Like two rivers, convenience store operators navigate both payment and loyalty relationships. The confluence of these two programs is the card and the consumer. Data suggests that retailers can recapitalize “Swipe Fees” as “Rewards” by leveraging consumer’s willingness to participate in loyalty programs and their increased preference to use debit payment.
According to “The Big Sort, 2009 COLLOQUY Loyalty Marketing Census, in 2008, 51 million consumers participated in Fuel/Convenience loyalty programs. 2009 saw the further expansion of loyalty with a number of retailers launching new programs. That same year, 422 million consumers participated in Financial Services loyalty programs (credit/debit rewards). While the convenience store industry was hammered by low margins under onerous interchange fees, financial institutions used up to 45% of the “Swipe fees” to drive their business forward, achieving nearly ten times the number of participants.
The January 2010 version of “The 2008 Survey of Consumer Payment Choice” published by the Federal Reserve Bank of Boston reveals data demonstrating consumer’s increased participation in debit rewards programs.
\The two studies point to specific trends that support the confluence of loyalty and payments. Consumers now belong to an average of 14.1 loyalty programs, but only 3.5 credit cards. The average consumer has adopted 5 “Payment Instruments”. More consumers have and use debit cards than credit cards (88.2% vs. 78.3% w/ 208% increased usage). Consumers have more “loyalty” to their debit card than credit card with 27.5% of consumers discarding a credit card, while only 5.9% reported discarding a debit card. The analysis indicates that consumers are more willing to join a loyalty program than a payment program. Further when customers use a card for debit, they are less likely to discard the program making for a double win; more enrollment with less attrition.
The conclusion is that growth in Fuel/Convenience loyalty programs and increased debit card usage considered in juxtaposition with the high rate of attrition of credit card users suggests that retailers offering debit rewards as a feature in the loyalty program could recapitalize a significant percentage of “Swipe Fees” as consumer rewards resulting in greater consumer loyalty and increased ROI.
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ACH, ach. loyalty, alternative payment, Bank Tax, card networks, credit card fee, credit cards, decoupled, H.R. 2382, House Financial Services Committee, interchange fee, loyalty, Mastercard, Merchants Payments Coalition, MPC, payment, Signature Debit, two sided market, Uncategorized
In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, payment, Payment card on March 18, 2010 at 9:51 pm
“Pandora opened her jar and unleashed many terrible things on mankind.”
In February 2010 the Consumers for Competitive Choice (C4CC) released a report called “The Costs of “Charging It” in America” by Shapiro & Vellucci: The report offers a number of conclusions, including the proposition that government regulation of interchange fees is Social Justice. Social Justice is a concept used to describe the movement towards a government regulated socially just world. The report suggests that the economics behind payment platforms, Two-Sided Markets and their inherent “Network Effects” create negative “Regressive Cross-Subsidies”. The suggestion is that interchange fees create a system where the poor pay for the privileges of the rich.
In a paper written by Bolt & Chakravorti titled “A Review of Payment Card Economics” published in the November 2009 Lydian Payments Journal concluded “There is no consensus among policy makers or economists on what constitutes an efficient fee structure for card payments”. They go on to say “efficiency of payment systems is measured not only by the costs of the resources used, but by the social benefits generated by them”. Shapiro & Vellucci would seem to agree when they add “The current credit card and debit card systems provide valuable services to consumers and merchants and those services involve legitimate costs and therefore prices. Apparently the concept of profit for risk is not in their equation.
Last week a Delaware politician suggested mandating Full-Service Gas as a job creation initiative. Today the NRF urged Senator Dodd to add Interchange reform to the financial services reform bill. The C4CC published report suggests that Interchange Fee Regulation is a morally just cause towards achieving a level of Social Justice. Are retailers ready to see Social Justice added into their margin equation?
(http://www.linkedin.com/in/peterguidi)
ACH, ach. loyalty, alternative payment, Bank Tax, credit card fee, credit cards, House Financial Services Committee, HR 232, interchange fee, loyalty, Mastercard, payment, PCI PED, PIN Debit, Signature Debit, two sided market
In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, payment, Payment card on March 1, 2010 at 7:25 pm
Alexander Woollcott said “Many of us spend half our time wishing for things we could have if we didn’t spend half our time wishing.” The same might be true when considering the high cost of card acceptance and the path to lower Interchange fees.
With eight words, “It is not on our agenda this year,” Barney Frank ended the speculation over H.R. 2382, the Credit Card Interchange Fees Act legislation aimed at regulating interchange fees. Representative Peter Welch (D-Vt.) explained saying “He (Frank) doesn’t want to necessarily spend time moving things here when there’s been so little response in the Senate,” Merchants are left exhaling with the slim hope that U.S. Senator Arlen Specter (D-Pa.) may introduce a bill that seeks to limit interchange fees. It now seems fair to say that the effort to use legislation to control interchange has failed, at least for 2010.
Merchants had pinned their hope for reform on The Merchants Payments Collation’s three pronged strategy, legislation, litigation and competition, to lower card acceptance fees. The question now: is competition the only option in the battle over interchange?
(http://www.linkedin.com/in/peterguidi)
ACH, ach. loyalty, alternative payment, card networks, credit card fee, debit cards, decoupled, H.R. 2382, House Financial Services Committee, interchange fee, loyalty, Mastercard, Merchants Payments Coalition, payment, Signature Debit, two sided market
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)
ach. loyalty, alternative payment, Bank Tax, card networks, credit card fee, credit cards, debit cards, H.R. 2382, House Financial Services Committee, interchange fee, Mastercard, Merchants Payments Coalition, MPC, payment, two sided market
In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, payment, Payment card, Uncategorized on January 22, 2010 at 9:40 pm
The law of unintended consequences is that actions of people—and especially of government—always have effects that are unanticipated or “unintended.” – Rob Norton, Fortune magazine
Beating up on the banks has a nice populist ring to it and so President Obama tailored this week’s proposed tax on banks to tap into public anger at Wall Street. Retailers’ might be concerned that Members of Congress sitting on the House Financial Services Committee confuse anger with Interchange fees and this populist anger. The White House press secretary would not discuss how a possible bank fee would fit into Obama’s fiscal year 2011, but Retailers can be sure that adding some of that $48 billion dollars in interchange fees to tax revenues will look like an appealing target.
Meanwhile, in the debate over interchange fees, retailer’s predictions of lower interchange fees, meaning lower consumer prices, clashed with the opinions of those in the financial sectors with dueling articles in both the Wall Street Journal and New York Times.
2010 will bring high anxiety as congress schedules votes on both H.R 2695 & H.R. 2382. We can only wonder what kind of difference Scott Brown will bring to the debate. Can legislation or litigation succeed and what happens if these efforts fail, is it time to seriously consider competition? What if the Federal Government sees Interchange as a new source of General Funding, how will retailer fight for lower interchange fees if the Federal Government sees them as a source of tax revenue? (http://www.linkedin.com/in/peterguidi)
ACH, ach. loyalty, alternative payment, card networks, credit card fee, credit cards, debit cards, decoupled, H.R. 2382, House Financial Services Committee, HR 232, Merchants Payments Coalition, MPC, payment, two sided market
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)
ACH, alternative payment, decoupled, H.R. 2382, interchange fee, two sided market
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
