Peter Guidi's Blog

Posts Tagged ‘ach. loyalty’

73rd NPECA Annual Conference – What is alternative payment

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, merchants, payment, Payment card, retailers, Uncategorized on April 28, 2010 at 11:21 pm

There are at least two possible ways to answer the question; “What is alternative payment?” one practical, one academic.

Practically, any payment solution that is not MasterCard or Visa is alterative payment. This is true because up to 90% of all card acceptance fees occur at the pump and these two associations, along with AMEX and Discover control a monopolistic percentage of the payment market. Practically, any payment other than the major card associations is an alternative payment. An Academic approach to the question is more elusive.

Suppose that “alternative payment” is a payment where the payment relationship is between the retailer and the consumer. If so, then cash is the ultimate alternative payment?  But what about all the emerging payment systems like NPCA or PayPal, Bling or BillmeLater? Are they alternative payment? What if we changed the meaning to say that: “alternative payment is any system that creates disintermediation between consumers, retailers and their financial institutions”. Does eliminating the network roles and captured costs of the current payment processing network define alternative payment or is there more?

For the convenience petroleum retailer alternative payment is a system that disintermediates the transaction while enhancing the customer relationship. Alternative payments systems allow the retailer to focus on the “Demand-Side” of payment using incentives and tracking data to influence the consumers “Method of Payment” and enhance customer loyalty. The result should be lower card acceptance costs and increased sales. Retailers using this definition will find the final answer to the question, alternative payment is one that delivers additional profit, rather than additional cost to the retailer.

What decision factors should retailers use when choosing between an open-loop vs. closed-loop alternative payment solutions?

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, merchants, payment, Payment card, retailers on April 22, 2010 at 3:31 pm

Prevailing wisdom is often wrong.  Mark Twain said: “Every generalization is dangerous, especially this one”.

The prevailing wisdom on payment is that open-loop systems are superior to closed-loop systems. Open-loop payment systems have four stakeholders; consumer, merchant, issuer, and network. It is generally accepted that successful payment systems offer the consumer at least three attributes; simplicity, safety and desirability. This has lead to the mantra that only ubiquitous payment products can achieve “top of wallet” status. The reason being that the consumer wants one method of payment rather than multiple options as a matter of convenience; consequently, it’s simple and desirable.

Yesterday, Target announced they are dropping its Visa cobranded program. The Target program was one of Visa’s largest cobranded programs. This decision is the strongest sign yet that merchants are reevaluating the benefits of offering general-purpose credit cards. Target said they tested a Target credit card and that research indicated that the Target credit card drove more sales. The test made a clear case for its private-label cards over general-purpose cards. So much for “prevailing wisdom”.

Closed-loop payments systems have two stakeholders, the consumer and the merchant. When a payment system creates disintermediation between issuer and the network (acquirer) the result is increased engagement between the retailer and the consumer. Engagement is good for business. If consumers are interested in single purpose cards, as Target’s test indicated, why share the relationship with two other parties?

Prudent retailers will consider the results of Target’s decisions and other trends in payment before making a final payment system decision. Recent research indicates that 38% of consumers will reduce the use of their credit cards. Visa has reports that debit usage has surpassed the use of credit. Last week VISA announced an increase in Debit rates. Retailers looking to leverage these emerging payment preference trends should consider closed-loop ACH decoupled debit. (http://www.linkedin.com/in/peterguidi)

Petitions or competition? The “Supply-Side” & “Demand-Side” of the two-sided payment 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

The convergence of payment and loyalty programming and the trends influencing consumer payment behavior.

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.

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

Is “Social Justice”, the new rallying cry in the battle over interchange fees? What’s next price controls?

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)

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)

“War on Cash” or “War of Words over Card Fees”; the battle between two industries with very different points of view.

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, payment, Payment card on March 5, 2010 at 1:43 pm

The epic battle between the Merchant Payments Coalition and the Electronic Payments Coalition heated up again this week when NACS spokesman Jeff Lenard was quoted in the America Public Media online journal “Marketplace” saying “Welcome to the war on cash,” in response to increasing debit card transaction fees. Adding; “that the credit card companies have to find new revenue sources” as a result of The Credit Card Reform Act, and that “one of those is going to be interchange”.

 Meanwhile the “War of Words over Card Fees” continued as the Electronic Payments Coalition (EPC) reported that Senator Arlen Specter (D-PA) has indicated to Pennsylvania banks that he will introduce legislation which will mirror H.R. 3282. The EPC says that the “legislation will potentially shift the cost of accepting credit and debit cards onto consumers”. Frank Pinto, CEO/President of the Pennsylvania Association of Community Bankers goes on to say “When retailers accept cards in their stores, they receive profits, customers, guaranteed payment, and the golden key to e-commerce–and they shouldn’t have their customers pay for this cost of doing business.”

 Rising Signature Debit Transaction Fees are the latest cause for merchant concern. Consumer behavior is changing as debit becomes the preferred “method of payment”. Card Issuers are competing with each other for the consumers business. One result is that the Issuers and Card Associations are promoting the use of Signature Debit over PIN Debit because the signature debit interchange fee is higher than that of PIN debit which funds the reward program. The justification for the different fees is that the financial risks associated with the two types of transactions are different; Signature being more risky than PIN and therefore meriting higher fees. The paradox is that the industry is promoting the use of the riskier transaction assumedly because it is more profitable. The reality is that debit fees are approaching credit card fees, and that the two tiered debit fee is probably going to be phased out in favor of the one higher interchange fee.

 Sun Tzu the historical military strategist is well known to have said “Know your enemy”. Another of his lesser known quotes is “opportunities multiply as they are seized”.

 The merchant community could heed his advice when thinking about payment. The payment industry has noticed the consumer’s preference for debit. As a result the card issuers are offering richer debit rewards programs as they compete for the consumers business. Merchants can expect to see the cost for these consumer transactions to rise as these programs grow in popularity. Merchants must ask themselves, has the time for war arrived and is the “opportunity” competition?

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

“It is not on our agenda this year,” is competition the only option in the battle over interchange?

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)

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)

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)