Peter Guidi's Blog

Posts Tagged ‘Mastercard’

“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)

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“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)

Pen or Pin: An expensive decision for the retailer. Are best things in life free, or do you get what you pay for?

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, payment, Payment card on February 3, 2010 at 9:49 pm

Debit cards are making news as the consumers preferred method of payment. Financial industry analysts predicted that debit cards would overtake credit cards and would start a change in the loyalty offering and other types of card incentives from credit to debit cards. It was never predicted that it would happen so quickly with such a tidal-wave type of shift. One major transaction processor, revealed that membership in credit card reward programs has declined from 71% of the consumers surveyed in 2008 to 67% this year. While at the same time, the participation in the debit reward programs has increased markedly from 34% of consumers surveyed in 2008 to 45% this year. This trend is expected to continue as consumers struggling under the load of credit card debt move to debit.

PCI PED deadlines appear like a fog bank on the horizon, big, dark, impenetrable and getting closer. Retailers are faced with the decision to either upgrade from older, no-secure PIN pads to PCI PED approved pads at significant cost, or to accept all cards as “signature” at the pump paying the higher “signature transaction fee”.

Meanwhile, banks are sending a conflicting message as retailers are now faced with PIN debit transaction fees that are nearly equal to signature debit transaction fees.  Adding injury to insult, Financial Institutions are offering consumers aggressive “debit reward” programs based on consumers’ choosing ‘Signature” rather than PIN.  Rewarding the consumer for using signature debit is essentially bribing the consumer to use a more expensive form of payment. One major bank recently released its “Swipe & Sign” program offering consumers a $10.00 gift certificate from Amazon.com for one “signature debit transaction” at a grocery store. The result is retailers are paying for more expensive Signature based debit transactions. This is a “dammed if you do, dammed if you don’t” situation. 

Retailers are wondering if the upgrading to PCI PED pin pads is worth the expense. They face a situation where the lower cost PIN debit rate is going away at the very same time banks are rewarding consumers to use signature debit. It appears that the banks are saying “no” to PCI PED upgrades.

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

Interchange fees: Obama’s next bank tax target

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)

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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