Peter Guidi's Blog

Posts Tagged ‘HR 232’

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. 

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“Reasonable and proportional”, issuance and rewards are out, Fraud is in!”?

In alternative payment, credit card, debit card, interchange, merchants, payment, Payment card, retailers, swipe fees on June 24, 2010 at 1:56 pm

Last week I discussed the operational costs associated with issuing cards and retaining members and postulated that the Fed should include these costs in the analysis of “reasonable and proportional costs associated with a transaction”. One reason these costs might be included is to support the competitive product offerings consumers receive from banks to enroll in the various programs that are offered. The expectation being that if these costs are not considered a part of the reasonable cost of the transaction, then the programs would need to be eliminated, thus limiting consumer choice. With the Durbin Amendment nearing agreement and inclusion in the final bill, it now appears that the answer to the question is; no, the regulation says these costs are not included in the Fed’s evaluation used to establish debit interchange fees. The deal reached between Messer’s Frank and Durbin expanded the meaning of “reasonable and proportional to the cost incurred in processing the transaction” to include the cost of fraud in its analysis, a recognition of risk associated with payment card issuance. Moving forward, Financial Institutions have good reason to remain concerned about the Fed’s price setting authority as the language for assessing costs is limited to “incremental costs” excluding operational and other costs like issuance and rewards.

The wild card remains the $10 billion exemption. Watch for a multitude of creative corporate structural changes and new programs from entities’ falling below the threshold. If you think the rate table is confusing now, wait until the banks attorneys’ drive through the Durbin Amendments’ loop-holes! 

(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)

“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)

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)

Market Power or Perfect Competition: The “Apples and Oranges” of the interchange pricing debate.

In alternative payment, credit card, debit card, interchange, payment, Payment card, Uncategorized on November 27, 2009 at 6:38 pm

Market Power gives a firm the ability to employ anti-competitive tactics like predatory pricing without losing customers to competitors. During testimony on H.R. 2382, the Representative of The Merchants Payment Coalition stated that “there is no competitive market for interchange fees – just naked price fixing”. On the other side, the Representative from The Electronic Payments Coalition called interchange an “important element(s) of the successful, competitive banking experience” adding that “interchange reflects a merchant’s fair share of the costs” (sic.) of the system.

Last weeks GAO report found that Merchants’ are in fact paying more to accept credit cards, but also added that “network competition in the credit card market may be contributing to rising interchange rates”.

Two-sided markets exhibit “Network Effects” when two groups of users are attracted to each other, in this case retailers who accept payment and consumers who make payment.  “Cross- Side Network Effects” occur when enough users are attracted to one side that the other side will pay dearly to reach them.  In this case, retailers are the “money side” and they pay to accept cards as a form of payment, while consumers are the “subsidy side” who receive incentives to use the cards as a form of payment. Linking these two groups together is the primary value of the payment platform creating powerful Cross-Side Effects.

Retailers’ accept cards as payment because so many consumers use cards for payment. Competition between card issuing banks to capture consumers, and networks to capture banks is intense as evidenced by the multiple offers for high earning rewards credit and debit products and their users. Retailers ultimately see the cost of this competition reflected in rising interchange fees, particularly the higher rate fees for reward based programs. The question is; does this competition between networks and financial institutions for the consumers’ payment business justify the increasing rates paid by retailers to accept these forms of payment or does it constitute a monopolistic example of a market failure?

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Interchanges fees and fairness, who’s money is it anyway?

In alternative payment, credit card, debit card, interchange, payment, Uncategorized on November 12, 2009 at 9:06 pm

Last month the House Financial Services Committee took testimony on H.R. 2382 from both the Financial Industry and representatives of the Merchants Payments Coalition which represents NACS. Both parties represented their point of view. On the retailer side, the argument remains that the retailers are unable to negotiate with the card associations for lower prices. Retailers expressed that banks and card associations are monopolistic so, congress should act to legislate and control fees or at least give retailers the ability to negotiate for lower fees and that the payment providers should be subject to Anti-Trust legal action. The key evidence being the “outrageous” swipe fees retailers pay to accept a credit card. On the other hand the Banks cried foul claiming that retailers are simply trying to use their power to gain the valuable credit card payment services without having to pay a fair price. The credit card representatives presented an argument demonstrating that interchange fees are fair, and in fact are undervalued.

This raises the question: Why would Merchants accept payment cards if the fees associated with the card are greater than the benefits? Interchange is a fee for a service that brings value to consumers and retailers and while retailers may have choices about method of payment, or even alternative payments, it turns out that promoting a method of payment is expensive and time consuming. It’s so much easier to put a sticker on the door that says” MasterCard and Visa” accepted here.  Eleanor Roosevelt once said, “It is not fair to ask of others what you are unwilling to do yourself” and therein may lay the answer. (http://www.linkedin.com/in/peterguidi)