Peter Guidi's Blog

Posts Tagged ‘Signature Debit’

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.

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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.

 

 

Who gets to choose? Durbin’s provision on “multi-homing” and the prohibition on network routing exclusivity.

In credit card, debit card, interchange, merchants, payment, Peter Guidi, Platforms, retailers, swipe fees on January 29, 2011 at 2:18 pm

Here is the question:  When considering Durbin’s requirement prohibiting exclusive debit transaction routing arrangements, does the merchant or issuer choose which second unaffiliated network is available to route transactions? The answer is unclear and its implications impact both the intent of the regulation and the technology required to implement the rule.

Thus far, the majority of interest in Durbin is focused on the impact of interchange fee regulation with little attention on the second aspect of the provision; network exclusivity and transaction routing. Durbin has two provisions, the second of which says “that neither the issuers nor network may restrict the ability of merchants to direct the routing of the transaction”.  The rule is intended to foster competition between networks. The concept being that when at least two unaffiliated networks compete for transaction routing, the price merchants pay will optimize.

The Board is requesting comment on two alternative rules prohibiting network exclusivity: one alternative would require at least two unaffiliated networks per debit card, and the other would require at least two unaffiliated networks for each type of transaction authorization method. Under both alternatives, “the issuers and networks would be prohibited from inhibiting a merchant’s ability to direct the routing of an electronic debit transaction over any network that may process such transactions.” Some have suggested that the answer to this question lies in the currently available least-cost routing selections available to consumers between PIN and Signature debit. In this scenario debit cross-routing is the solution to network exclusivity. One expert suggests that “one such solution would be Visa for signature debit and Maestro for PIN debit. They are not affiliated, and thus fulfill the requirements of the first alternative.” The existence of the second alternative makes it clear that the Fed has not yet decided whether signature and PIN debit are one market.”

The contradiction is between the intent of the regulation and the Boards’ rule making process.  The differentiation between routing based on a transaction or a card may delineate the type of routing available, but it does little to foster routing competiveness. The intent of the regulation is to foster competition between networks.  Allowing the Issuer to choose the second network by pitting the PIN and Signature networks against each other is a weak proposal. On the other hand, if merchants choose the second network from a multitude of routing options competition will emerge, but how does that work? In order for the merchant to have a choice between a variety of networks, Issuers would have to support routing on all networks. In this scenario merchants might choose different networks on a location or regional basis? Implementing this type of network routing matrix will mean substantial changes in the infrastructure and business rules. The time and effort to create such a system is currently unknown. If competition between networks is the congressional goal this seems to be the correct interpretation.

The alternative interpretation is for the Issuer to offer the merchant a choice of two networks. In this case every Issuer would be forced to offer two networks for processing a transaction.  As an example, Visa and MC may have to route each other’s transactions. The merchant would be able to choose which of the two available networks to route the transaction.  Presumably, creating competition. As a result the merchant would choose the cheaper of the two. However, this scenario does not assure the merchant choice and adds the possibility that the Issuer could offer a second network with higher fees. In this case the second network would be the more costly option resulting in no opportunity for merchant savings.

How a two-network solution is allowed under the final version of the regulations remains unknown. It does seem that merchant choice fits congressional intent more clearly than Issuer choice, even if the technical challenges and costs to develop such a system are currently not contemplated or that the rule making process appears to miss the point.

(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.

“Reasonable and proportional”, is issuance and the cost of reward programs a part of the “incurred payment processing costs”?

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, merchants, payment, Payment card on June 17, 2010 at 9:34 pm

Lost in the debate over interchange fees and the Durbin amendment is a focus on how payment card products reach the consumer. One of the key points of the amendment is to mandate that the interchange fees on selected debit transactions be “reasonable and proportional to the cost incurred in processing the transaction” Merchants have taken the position that as the volume of transactions have increased, the economies of scale and overall effectiveness and efficiencies of the payment processing network have improved, and therefore the cost of transaction processing have gone down. The fact that interchange has gone up during this period is used as evidence that system is corrupt and anti-competitive. This point is heard when Senator Durbin says that government needs to “reasonably regulate this system”.

Missing from the debate on interchange and what constitutes the costs incurred in processing a transaction is consumer acquisition. Consumer acquisition costs are incurred in at least two areas; enrollment (consumer application) and rewards (loyalty programs & retention), to say nothing about overhead, like customer service. This week both Citigroup and TD Bank launched new “Debit Rewards” programs. Citigroup launched a 5% debit card cash back promotion, while the TD Bank program offers 1 point for every $1 dollar spent. In both cases, these reward programs are only available to consumers who use signature rather than PIN debit. As a consumer, which program should I choose? These are two highly competitive businesses, each offering me a product and a service. Each has put their best foot forward and is universally accepted. Both have used a different approach; one uses point’s, one utilizes cash back, and the choice is mine. If the Durbin amendment is successful and retailer acceptance is selective, and interchange fees regulated, would the consumer have these same choices?

Merchants involved with loyalty programs understand the costs associated with advertising and marketing to drive enrollment and fund reward programs. Industry sources report that up to 40% of all interchange dollars paid by merchants are used to support payment card loyalty programs. That means, in 2008, consumers may have earned up to 19 billon dollars in consumer rewards; a cost borne by the merchant, but also a cost to the issuer (bank).

The suggestion is that high fees are a result of no competition in the payment card market. In reality, the high fees are a result of intense competition. It just happens, that the competition is between banks (issuers) fighting for the consumers’ business.

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

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)

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)

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)