Peter Guidi's Blog

Posts Tagged ‘ACH’

“For their return home, the Greeks dedicate this offering to Athena”. Apple Pay and increased mobile payment fees.

In mobile payment, Retail Payment on October 23, 2014 at 12:00 pm

The Blogosphere has been alive with information on mobile payment and Apples introduction of Apple Pay. The flame-out of PayPal Off-line, Google, Amazon, ISIS (or whatever), and MCX (whenever) have the experts writing and talking about how, when and where mobile payment will become common place.

Enter Apple. While Apple may indeed be the first broad based mobile wallet to achieve consumer adoption, Retailers will remember Apple as Odysseus’ and Apple Pay as a wooden horse bearing higher payment fees. New fees may start arriving in the first statements and no doubt merchants will be asking about the tokenization, wallet storage and API fees. According to legend, “after a fruitless 10-year siege, the Greeks constructed a huge wooden horse, and hid a select force of men inside. Once inside the walls of Troy, the Greek force crept out of the horse and opened the gates to allow the Greeks to enter and destroy the city of Troy.” A fruitless siege might be a good way to describe the tug of war between retailers and banks; abetted by the technology, to describe the painful march to mobile payment. Apple brings scale and technology, but it is their Trojan Horse approach to payments fees and merchants opening the doors to Apple Pay seems eerily like the Troy opening it gates.

Apple deserves applause for devising a strategy that hides their transaction costs within the issuer as a share of interchange rather than charging the merchant directly. Herein the lies the “Trojan Horse” and the promise of higher fees in the future. Published reports indicate Apple will be paid 15 basis points by the issuer (Banks). Retailers need to ask themselves, how long before this cost is shifted to the merchant by way of a higher acceptance fees? My guess, about the same time Apple reaches 10 million Apple Pay consumers.

The big unknown is how high will fees go? The answer is as high as possible. Merchants often say there is little competition in the card fee world and therefore it’s a monopolistic business. Apple Pay can only add cost and another partner that needs to earn profit. 20 years ago banks convinced retailers to accept card based payment using low fees, the results are clear. As merchants open the gates and let Apple Pay in, they should hardly be surprised when Apple Pay is earning 100 basis points rather than 15, and it won’t be the issuer paying the bill.

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Lower fees get the headlines, but might not be the story. Why multiple unaffiliated networks is the real bombshell in Judge Leon’s decision.

In alternative payment, Bank Fees, Bank Tax, big data, credit card, debit card, interchange, merchants, payment, Payment card, Peter Guidi, retailers, swipe fees on August 13, 2013 at 7:13 pm

Groucho Marx once said that “Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.” Judge Leon might have been better served had he considered the wisdom in Marx’s thought before his recent ruling throwing out the current Fed’s implementation of the Durbin Amendment.

When Judge Leon threw out Durbin saying “The Board has clearly disregarded Congress’s statutory intent by inappropriately inflating all debit card transaction fees by billions of dollars and failing to provide merchants with multiple unaffiliated networks for each debit card transaction” he may have opened the legislation to a potential flaw that might just make implementation of Durbin impossible

In an August 13 article published in American Banker called “Damage to Banks from Debit Card Ruling Goes Beyond Lower Fee Cap”, Kevin Wack writes “Perhaps just as significant, but less discussed, the judge also ruled that retailers must be given the choice of routing each signature debit transaction, as well as each PIN debit purchase, over at least two card networks.” Kevin is correct, fees impact the economics of the transaction, but like the highs costs of implementing EMV, multi-homing has technical implementation costs far beyond the cost of the transaction. I covered this this issue in this blog, January 2011, “Who gets to choose? Durbin’s provision on “multi-homing” and the prohibition on network routing exclusivity” Here is the issue. I asked a well know expert this question: what makes multiple unaffiliated networks a complex requirement? His answer: “most retailer’s payment systems route transactions based upon the Bank Identification Number or BIN.  They do not have the ability to make different routing decisions if a PIN is present or not.  Additionally, a lot of smaller merchants do not have direct connections to networks but instead route the majority of their traffic to a merchant acquirer who then will determine how the card needs to be authorized based upon processing agreements that retailer has in place.  While the concept of allowing networks to compete for the same card traffic sounds attractive, from a practical matter it is far more complex.  And as raised in the most current legal opinion, the ability to route between non-affiliated networks needs to be at the transaction level, not the card level. “

I wanted a bit more granularity and so another source tells me that “Although most retailers do not connect directly to debit networks, there is nothing other than cost that prevents them from doing so. As EMV comes into the US domestic market and each Debit Issuer is tagged with their own network EMV AID(application identifier on the Chip), we may see more large scale retailers choosing to connect directly with their network of choice. A lot of stuff is up in the air right now. The next 10 months will be very exciting in terms of the number of changes coming to the debit networks above and beyond Judge Leon’s judgment. I doubt if the Federal Reserve or Congress will be able to keep up with everything that is happening in this space in the interim.”

So, Judge Leon concluded that the Fed must allow retailers the choice of two unaffiliated networks for each individual purchase — whether the consumer elects to make a signature or PIN debit transaction, never mind the costs or complexity of making it so. I come way feeling like Judge Leon clearly does not understand how routing actually works especially for small merchants.  He seems to believe there is a “Payments Genie” and that rubbing the lamp makes payments happen. The intuition is easy, but the way this actually works as a technical matter I think is a mystery to people.

Dodd-Frank: thrown out again; is it a win?

In Uncategorized on August 2, 2013 at 8:37 am

As just about every pundit in the country is writing about, yesterday’s action by a Federal Judge gave the Fed another set-back by tossing out a second provision of the Dodd-Frank bill. Apparently the court is not as fond of the Fed’s actions as the agency would like. In case you missed it, the first ruling occurred last month as key provisions designed to limit speculation in the commodity market was also throw out by the court.  So while the retail focus is on the ruling as it applies to fees, perhaps a better question might be; can Dodd-Frank survive?

After yesterday’s news, my inbox started filling up. Since National Payment Card Association is the industry’s leading provider of alternative payments and many see our low cost ACH transaction as the answer to high cost bank card fees, our customers, contacts and prospects are wondering what this means to their plans. The question is, will lower cost bank card fees mean the end of merchant issued debit? Before offering my take on the ruling, let me answer the question. Even if we see lower rates on bank issued debit cards, the merchant issued program remains the most cost effective and successful use of capital to drive additional sales and profit. Let me explain.

NPCA customers typically capture between 20% and 40% of their total transaction volume with our program. Consumers who enroll in the program do so for the reward, not because the card has a lower fee. The result is that our customers experience increases of up to 40% in sales volume from the enrolled consumer base. It is the profit generated by these sales, rather than the saving on the transactions that drives ROI. In many ways, I think there is a good chance that yesterday ruling may actually help, rather than hinder, the business opportunity for retailers with NPCA,

So here’s my take on the judge’s ruling; let me preface this by saying, we’ll need to see, there is no crystal ball on this one.

1.            First, I wish I were a lawyer retained on this issue, this means years of work. The next date is August 14th and you can be sure all of the parties will come “armed for bear”. There will be multiple lawsuits, appeals, legislative hearings and more. Let’s not forget, a big part of the rational for Durbin was that Retailers would give the saving back to consumers. Has that happened? 2014 will be an election year, one result may be that Durbin is dropped all together. You can expect the Banks to make this case. If we see a Republican senate in 2014 I’d say the good money is on over turning Dodd-Frank all together, with a veto from the President. Durbin will be lost in this mess.

2.            If the Fed capitulates and takes action to force a 12 cent fee on banks, the market impact is likely to be huge. Debit Cards as we know them may/will go away. Banks cannot or will not operate the debit card network on 12 cents. It’s the reason why only regulated banks where covered in the original rule. One possible result, a consumer charge for carrying a debit card, perhaps a bank fee; once again, who knows. Regardless of the actual result, Debit Rewards will be nonexistent only increasing the power of a merchant issued card.

3.            Not all consumers are paying with debit, and those who do lost debit rewards long ago. Lowering the fee only lessons the economics for banks to compete with the NPCA or merchant issued program.

4.            More uncertainty. The ongoing struggle between the Fed, Congress, the Executive, and the Judiciary will contribute to the uncertainly in the banking market. Retailers can capitalize on this period by introducing their own method of payment. NPCA offers the retailer a stable program designed to increase sales though frequency and basket size. While the industry fights, our retailers will grow and profit.

From an NPCA perspective, what we’ve seen is our customers are focused on leveraging the loyalty aspect of the NPCA program. The real value in our program is the ability of the retailer to reward their consumer for the use of the merchant card. This feature and the underlying economics remain unchanged, regardless of what happens in Washington.

Three emerging trends in payment

In Uncategorized on April 8, 2013 at 4:17 pm

Consumer payments will experience accelerated change in 2013. Multiple disruptive and innovative companies, particularly 3rd party app developers and retailer branded mobile solutions, will enter the market to challenge the incumbents. Traditional payment processing networks and financial institutions will struggle to keep pace with nimble, tech savvy competitors. “Payments incumbents will leverage their market power to battle disruptors. MasterCard’s new fee structure for “staged” digital wallet providers such as Google Wallet, PayPal and Square” are an early shot-across-the-bow in a fight that will set the stage for payments over the next decade. The legacy technology managing the current payment processing network will be unable to keep pace as new POS and cloud based programs enable merchants and consumers to pick winners and losers.  Mobile solutions; coupled with low cost alternative payment, in conjunction with retailer funded rewards, will become more abundant, more accessible, and deliver greater value.

The eco-system is changing. A new “Retailer-Consumer-centric” payments paradigm is emerging. The future of the new paradigm will be shaped by three disruptive digital (POS based combined with IP communication) trends:

◾The POS Payments Cloud:  The last 10 years has brought major change to the POS and communications.  Less than 10 years ago the POS was a relatively limited device and communications were slow and arcane, at least by today’s standards.  The traditional legacy payments processing network relies on processors, associations and financial institutions in conjunction with POS vendors and a “heavy” communications systems like the Hughes satellite network to enable electronic payment. Unlike the consumer and their expectations, change within this eco-system is difficult, time consuming and expensive.  POS vendors are setting the slate to disintermediate the traditional network through the introduction of the “payment cloud”. Today’s POS is a powerful device built with open standards capable of supporting a wide range of payment and loyalty solutions. The internet changed the nature of communication allowing low cost, reliable, fast, and secure connectivity. Emerging payment models leverage the combination of POS capability and the internet to disrupt traditional payment economics. “Merchants have a growing set of payment options that do not adhere to the traditional interchange or processing fee model. Some of these options even deliver additional value above and beyond payment processing. As merchants adopt these new payment methods, their expectations will reset and they will expect lower costs and greater value from incumbent payment service providers. Traditional economic models will not disappear overnight, but it would be a mistake for payment incumbents to dismiss the growing number of unique pricing schemes and the disruptors who are moving aggressively to gain scale”. Watch for the emergence of these POS payment platforms in 2013.

◾Mobile Payment: Mobile payment and digital wallets will change the nature of the relationship between the consumer and the retailer. New technology will enable a robust “dialogue” between the consumer and the retailer during the “purchase cycle” allowing the retailer to engage the consumer before, during and after the transaction.  Technology “will drive adoption by integrating capabilities that remove friction and transform the payments and commerce experience in contextually relevant ways. These wallets will embed capabilities that can create a more convenient commerce experience for consumers and give merchants a growing set of potential benefits — that may provide a distinct competitive advantage — to evaluate and weigh against the additional costs of wallet acceptance.”

◾ACH & Merchant Issued Rewards: The advantage merchants have in mobile payment is two-fold. First, merchant control access to their mobile payment environment, they will decide what forms of payment are available to the consumer. Secondly, rewards are the key driver for consumers as they choose their method of payment and rewards are controlled by the merchant.

 

Low cost alternative payments in conjunction with merchant issued rewards will appeal to a broad base of retailers and consumers. The loyalty industry in the US is significantly more than $10 Billion dollars and growing. Current card acceptance fees are in the two percent range adding up to billions of dollars. Merchants who leverage the combination of these two line items will offer consumers powerful incentives. Clearly, Merchants can have a lot of influence regarding payment choice with this type of spending. “Disruptors are creating better, lower-cost alternative products and services that deliver more value and meet broad-based payment needs.” Retailer services will provide consumers with personal, relevant offers designed to drive a more profitable purchasing experience.  ACH payment will lead the way towards low card acceptance fees. Retailers who recapitalize these fees as consumer rewards will see increased sales and profits.

 

It will take a few years before we see the full force of this disruption. Retailers will be hesitant to make the technology changes necessary to support the new payments paradigm. Some will wait as end-of-life requirements make change inevitable, others will jump in early and gain leverage in their market.

2013 will be an interesting year for the payments market, what changes do you see in your organization?

New Bank fees set the stage for Merchant Issued Debit and Rewards.

In alternative payment, Bank Fees, Bank Tax, Coalition Loyalty, Convenience Store, credit card, debit card, interchange, loyalty, merchants, payment, Payment card, Peter Guidi, Petroleum retailing, Platforms, retailers, swipe fees, Uncategorized on October 1, 2011 at 3:01 pm

The stage is set for an epic battle between the merchant community and the financial industry to win the consumers method of payment (MOP).  This week, BoA joined the list of financial institutions announcing either fees, or cut backs in consumer rewards programs, for debit card use .  Senator Dick Durbin sounded surprised when he said of BoA’s actions; “It’s overt, unfair” adding that “Banks that try to make up their excess profits off the backs of their customers will finally learn how a competitive market works”. Many in the industry had long predicted that this would be the immediate result of the regulation (see my June 13, 2011 Blog).  Regardless of the merits of the regulation, or the banks reaction to it, one immediate result is that merchants have the opportunity to steer consumers to a lower cost form of payment (debit): the question; will they be able to leverage this opportunity, or will the payments industry adjust their payments offerings steering consumers to unregulated forms of payment with higher fees i.e. credit, pre-paid cards, etc.

The pivotal decision for merchants is how to recapitalize the anticipated saving from swipe reform and use that money as an incentive for consumers to choose a lower cost form of payment.  Many merchants, particularly in the petroleum and grocery industry are already actively competing for method of payment by offering ACH decoupled debit card programs (merchant issued debit) or cash discounts. For these merchants, and vendors offering alternative payments  like PayPal or National Payment Card Association, the Durbin Amendment is living up to expectations providing them with a strong tailwind to the merchant and consumer.

Merchants are understandably cautious as they approach payment.  While technology, investment and ramp time look like the heavy lift, the real challenge is to understand the economics.  Traditionally merchants have relied on the bank and card associations to deliver payments.  During the lead up to regulation one argument was that; “there was no competition for payment”. Merchants’ successfully argued this point, irrespective of the intense competition between banks for consumers. What was missing from the debate is that the reason consumers use one form of payment over another is often rewards. These rewards had been paid by the issuers of the card using interchange fees (as much as 50%), and now with regulation, that funding source has disappeared.  Therefore merchants can provide consumers with the same incentive to use a low cost form of payment by offering merchant issued rewards.

Finally, there is a saying “He who enrolls; controls”. Issuance or enrollment is a critical question for merchants choosing to compete for MOP using rewards. Assuming that the merchant chooses to offer rewards for a specific MOP, which MOP should it be, cash, PayPal, Google, or perhaps a merchant issued debit card.  The smartest strategy might be a flexible approach to payment where rewards are based on the costs associated with the method of payment, regardless of whether the rewards are paid for by the merchant, or a 3rd party.

Durbin’s Catch -22, Merchant Issued Rewards.

In credit card, debit card, interchange, merchants, payment, Payment card, Peter Guidi, Petroleum retailing, Platforms, swipe fees on June 13, 2011 at 9:13 pm

Merchants have won a battle, but the question is: can they leverage the advantage and win the war for the consumer’s method of payment?

The phrase “Catch-22” means “a no-win situation” or “a double bind” of any type. In the book, “Catch-22”, Joseph Heller describes the circular logic that confronts an airman trying to avoid combat missions by saying that his claim of insanity is the proof of his sanity. With the passage of Durbin, retailers are faced with the same circular logic. The Catch 22 of Durbin is that consumers must choose debit if retailers are to save on interchange fees, and consumers will only choose debit if offered rewards or to avoid bank fees. Today consumers choose debit in large degree to earn signature based debit reward or because PIN debit does not have bank fees as opposed to credit cards where there are annual fees and interest.  Durbin will change that paradigm as banks make up lost revenue by eliminating signature debit and adding fees to, or eliminating, pin debit cards. If those changes occur then retailers will need to fund consumer debit rewards to promote debit payment. Because merchant issued debit rewards erode Durbin’s potential cost savings, the potential is that total debit transactional fee may be higher than those during the pre-Durbin era…Catch-22.

Durbin’s challenge to Retailer’s is how to influence the consumer’s method of payment. Just because consumers are choosing Debit today, does not mean they will be choosing Debit tomorrow. The reasons why consumers choose one form of payment over another (Debit, either signature or PIN, cash, credit, check, prepaid etc.) are complex, but “Rewards” plays a large role in the process. In fact, nearly 50% of all interchange dollars are used to fund reward programs. A quick review of Bank advertising for Debit will show that Debit Rewards is tied to Signature Debit, not PIN Debit; “rewards are ” Pen, not PIN”.  Rewards for Signature Debit, plus “No Fee” PIN debit has created significant consumer demand for debit products. The banks loss of signature debit interchange fees means that these reward programs will disappear and consumers will begin paying fees for PIN debit. The result is that Durbin will change both the Debit and Payment Card market, not just the fees.

Look for these results:

1. Look for more pressure on retailers to install Pin Pads. Signature debit will go away as Financial Institutions will not longer offer signature debit. The whole point of signature debit was capture credit card like interchange fees. Debit rewards programs are funded by credit card like interchange fees and at Durbins mandated +/- 12 cents there is no “rabbit in that hole”. The reason retailer’s implemented PIN pads (3dez) were to move consumers from Pen to PIN. If Merchants are to win from Durbin, PIN Pads will play a large role in that success; otherwise there will be no debit at retail. Durbins “$10 Billion” exemption is a wild card. If smaller institutions introduce aggressive signature debit programs at the expense of larger institutions then Durbin will prove to have cost retailers more than they will save.

2. Financial Institutions will seek ways to replace lost revenue. The most immediate impact is likely to be fees on both dda accounts and perhaps the use of debit cards either as a transaction fee or monthly fee. Banks will discriminate against Debit making it less attractive. One of my associates added “Issuer’s already have plans to discontinue issuing debit cards and returning to ATM only cards.” He adds “other issuer’s are going to place a transactional cap on debit cards instead of taking them away.  They will only allow a transaction for $50.  If the transaction is $51 – then, another $1 transaction will have to run.”  Say good-bye to friendly debit transactions.

3. Watch for growth in closed loop debit card, particularly ACH Decouple Debit.

In the short term, Merchants will realize a windfall as consumers who use Debit maintain that method or payment. Debit usage will drop off unless Merchants introduce “Merchant Issued Rewards”. Merchant Issued Rewards are another name for loyalty. I can offer more on that if requested. The question retailers need to answer is: If you must offer rewards to promote debit, why not promote your own debit card? Durbin will increase the importance of loyalty rewards as merchants compete with FI’s for the consumer’s method of payment (i.e. PIN Debit).

4. Watch for more aggressive Credit Card and Pre-Paid card offerings with lower credit card fees, easier credit and more aggressive rewards. Pre-Paid is apt to be the next place the FI’s push for consumer adoption and fees. As the economy strengthens, and consumer debt drops the structural issues negatively impacting credit will lesson. Financial institutions can impact the consumer’s attitude towards credit by being more consumer friendly. The loss of signature debit will hasten this activity.

5. One “Wild Card” is the DOJ lawsuit on credit card interchange fees. There has not been a lot of press on this, but there will be soon.

 

 

Debit or Credit, the role of merchant-issued rewards and the consumer’s choice of method of payment.

In credit card, debit card, interchange, loyalty, merchants, payment, swipe fees on December 28, 2010 at 10:45 am

On December 16, 2010 the fog began to lift on where Section 1075 of the Durbin Amendment would lead as the Federal Reserve Board issued its proposed interpretation of the legislative language. One question on many peoples mind is how the new regulations will impact consumers. Voices on the banking side seem skeptical that the regulation will have any positive impact for consumers sighting Australian studies where retailer prices appear unchanged as bank fees rose and payment options declined.  On the other side of the argument, the National Retail Federation welcomed proposed regulations saying “a significant reduction in the fees would result in lower costs for merchants and could lead to discounts for their customers.”

NRF Senior Vice President and General Counsel Mallory Duncan said. “The combination of reducing rates and allowing retailers to offer discounts will go a long way toward stopping the current scheme where big banks take a bite out of consumers’ wallets every time they use a debit card.” He goes on to say that the NFR “will work closely with the Fed as these regulations are finalized to ensure that the reduction in fees – and the amount of money retailers can offer customers as a discount – is maximized.” And so it seems that the stage is set for retailers to offers consumers discounts if and when they use a debit card to pay for their purchase.

In a recent article published in PYMNTS, Katherine M. Robison of O’Melveny & Myers LLP says that “while the Board says it understands and appreciates the importance of debit cards to consumers, it is disturbing how little the interests of consumers entered into its justification for the Proposal”.  She goes on to say that “The debit card market is a two-sided one, with merchants who accept debit cards on one side and consumers who use them on the other.” Her point being that in this two-sided market an action that may decrease consumers’ demand for debit (say by making debit transactions less appealing to them) will ultimately decrease the utility of debit to merchants.  Further, if Banks add fees to the checking account or the use of the debit card while eliminating reward programs consumers will also find debit less appealing. She adds “So while lower interchange fees may encourage more merchants to accept debit cards, at that point there may be fewer consumers who want to use them.” Enter the role of merchant issued rewards.

Consumers could benefit from a rewards battle between merchants and banks for their method of payment. On one side will be the issuers of credit cards, on the other will be the retailer and the winner could be consumer as they rack up rewards by choosing either credit or debit. Their choice will be simple, choose to use a bank issued credit card and earn rewards like airline miles, or choose a debit card (either bank or merchant issued) and earn retailer funded rewards. The decision will be based on which offer the consumer finds more attractive? 

Over the last five years a variety of alternative payment providers. Like National Payment Card Association, have brought forth payment technologies like merchant issued debit cards designed to circumvent the traditional payment processing network delivering a lower cost transaction to the retailer. Now with the Fed’s proposed interpretation of the rule, bank issued debit cards will carry similar fees and so the retailers will face an analogous implementation challenge. How does a merchant motivate a consumer to use a lower cost form of payment? Merchant rewards are the obvious answer. And so the question is; will retailers recapitalize the cost difference between a traditional credit card transaction and the new debit fee and use the savings as a reward? And if not, why would the consumer choose to use a debit card rather than a credit card? Retailers will face a variety of challenges leveraging these new fees to their advantage.  Most notably is that the possibility that a debit transaction with merchant funded rewards may actually cost more than the original bank fee for a debit transaction. 

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

Competitive opportunity in a post Durbin world: richer debit rewards as the unintended consequence of the $10 billion exclusion.

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, payment, Payment card, Petroleum retailing, swipe fees on October 27, 2010 at 7:16 pm

Dozens of articles have been written about the impact of the Durbin Amendment on the payment card industry, with nary a positive comment in the mix. The focus has been on the punitive impact that the legislation will have on both financial institutions and consumers. The consensus has been that banks will lose significant revenue and that consumers will see more bank fees as costs are shifted to make up for lost interchange revenue. This article takes a different approach and looks at the new market opportunity hidden in the bill, the opportunity for smaller financial institutions to launch aggressive debit reward programs fueled by higher interchange fees.

Under Durbin’s “reasonable debit fee requirement,” there is an exemption for banks and credit unions with assets under $10 billion (this includes 99% of all banks and credit unions). This means that Visa and MasterCard can continue to set the same debit interchange rates that they do today for small banks and credit unions.  Those institutions would not lose any interchange revenue that they currently receive; in fact they could receive even higher rates. Many experts writing on Durbin have concluded that this exception will be meaningless because the networks will be unable to accommodate multiple fee structures and as a result, while exempt, interchange fess on those financial institutions will suffer along with their larger brethren.

The argument is that the required costs and effort, such as network IT changes to accommodate multiple interchange fees, make this outcome unlikely. The recognition that business pressure from small banks and credit unions on the networks, Congress or the Fed could leave the networks with little choice but to develop a two tiered fee structure may alter this conclusion. A few weeks back, TCF, an issuer whose business is above the $10 billion exemption, filed a lawsuit stating, “the thousands of banks exempted from the amendment will be free to continue to charge retailers the current debit-card interchange rate and recover all their cost plus a profit. This will result in an irrational competitive disadvantage for banks like TCF that are subject to the new regulations.” It appears from TCF statements that the idea of 7000 smaller financial institutions issuing a new class of richer debit reward cards seems not only plausible, but probable, and a real threat to their business. The focus on the challenges associated with creating a network pricing schema that allows for multiple interchange rates, rather than discussing the market dynamics, is missing the business opportunity.

The reason this will happen is that the payment card industry is a two-sided market. Durbin treats the payment industry like a utility, but this analysis is mistaken. Durbin and its proponents have argued that the payment card industry lacked competition. This falsity, propelled by an active merchant lobby, found resonance in Congress. In reality, the payment card business is a highly competitive marketplace. It just happens that the competition is between financial institutions fighting for a larger share of the consumer market. The result of this competition is higher fees to those wishing access to the market.  Durbin seeks to upset this market, ignoring the two-sided market economics driving consumer demand.

Consumers will move their purchasing to whatever product provides the most incentives. Merchants will accept the business from any large group of consumers, and Durbin does not allow merchants to discriminate by issuer on a network. What this means is that smaller financial institutions will introduce richer debit rewards programs attracting larger shares of consumers who will then shop at retail locations using those cards. Retailers will not turn customers away because payment method would be become a factor in the consumers choice of retailers, something no marketing department will allow.  This is the result of network effects, and they are the unavoidable economic reality driving the industry. The resulting competitive dynamic is in play: issuers will want to try to drive up fees on the merchant side of the market, delivering greater rewards on the consumer side. Consumers will look for low-fee banking services and richer rewards that are supported by these programs. As a result, millions of consumers will gravitate from the 90 or so issuers affected by Durbin to the 7000 who are excluded. This looks like opportunity.

The real question is how long it will take the networks to code the system to handle multiple prices for issuers. I’d be surprised if the work was not already well underway and available not long after the Fed sets its rates. Durbin will have closed the door on the top 90 issuers, essentially putting them at a competitive disadvantage. But in closing that door, the way has been cleared the remaining 7000 financial institutions to develop their debit rewards business. In many ways Durbin did for the network what they could not do themselves; i.e Durbin eliminated the power of the major issuers and opened the market to the smaller financial institutions.

The TCF lawsuit has been both ballyhooed and scoffed at.  No matter the outcome in court, the case will have an impact on the industry. If Durbin passes all of its legal challenges, the irony may be that the consumer will benefit as a result of richer rewards programs from smaller issuers, and merchants will see card acceptance costs rise taking no comfort knowing that they won a battle but lost the war.

Does regulated debit “Swipe Fees” mean the end of cobranded debit card programs?

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, merchants, payment, Payment card, retailers on June 4, 2010 at 8:16 pm

Retailers choosing “open-loop” or “closed-loop” alternative payment system might want to consider the long term viability of the open-loop business model, particularly in light of their campaign to regulate and lower the associated “swipe fees”. 

Affinity, cobranded credit card programs have opportunities for both the bank and the merchant. While the “no or low fee” in-store use of the cobranded card is a big attraction, Retailers also profit from cobranded credit cards when consumers use the card to make purchases. When a consumer uses a co-branded credit card, the accepting merchant pays the “swipe fee”.  The cobranded merchant earning “swipe fees” is an example of network effects in a two-sided market. In this example, the merchant is leveraging their customers to market a bank product. Organizations that have the marketing to reach their customers will get the response needed to make the program successful. Ironically, much of the success will be a result of the high fees paid by the merchants who pay the “Swipe Fees”. 

Retailers evaluating merchant issued ACH decoupled debit card programs consider the same model while evaluating their choice of “Open”, or “Closed” loop payment systems. The question is can the decoupled debit card generate revenue for the issuing merchant in the same way cobranded credit card products do. Ironically, the answer all depends on the “swipe fee” the 3rd party merchant pays when the consumer uses the card. The higher the fee, the more successful the program. 

In order for an ACH decoupled debit card to work in an open loop system the card must affiliate with a bank, and a network. Today’s interchange rates for PIN debit are already comparatively low. The challenge for cobranded cards is to offer a level of consumer rewards that will motivate the consumer to use the card. This is the reason that debit rewards programs are offered for signature debit and not pin debit transactions. As Merchants anxiously await the passage of the much ballyhooed Durbin amendment, they might consider its impact on the cobranded card. If “swipe fees” for debit are regulated, (decoupled debit card programs included) there will be no dollars in the program for either the consumer, or the cobranding retailer. If the consumer does not receive rewards to use the card, and the retailer is not earning money from the program, the network effects driving the value of the platform will be eliminated, making the cobranded credit/debit card program obsolete.    (http://www.linkedin.com/in/peterguidi)

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.