By Patti Murphy
The Takoma Group
Is the interchange pricing model a long-term, sustainable ideal? Chances are it's not. But this shouldn't signal the demise of revenue streams from merchant acquiring.
For starters, interchange is a revenue source of choice for card issuers.
For acquirers and their partner firms, interchange shouldn't be more than a base upon which they build their own revenue structures. Today, these consist of bundled fees (such as merchant discount), fees for administrative services, equipment leasing, access to cash advances and, perhaps most importantly, alternatives to traditional payment systems. The more products they offer, the less dependent they become on the merchant discount.
Although nobody expects any new or emerging payment alternatives to surpass traditional bank-branded credit and debit products, some are making notable headway.
An increasing number of retailers, for example, are turning to automated clearing house (ACH) to convert paper checks to electronic payments. In the third quarter of 2007 (the most recent period for which data is available), merchants converted more than 123 million POS checks to ACH debits, according to the NACHA - The Electronic Payments Association, representing a 53.2% increase over the third quarter of 2006.
Even some card issuers are being drawn to the ACH. This is evidenced by the emergence of so-called decoupled debit cards, which use the bankcard networks to authorize and switch payments, and the ACH for final settlement between the acquirer and the bank where consumers maintain their checking accounts.
The latest challenge to interchange came in December, when the European Commission ruled as anti-competitive certain interchange fees assessed by MasterCard Worldwide.
Fees subject to the ruling apply to virtually all cross border transactions and certain domestic payments using MasterCard- and Maestro-branded cards. The fees are known as multilateral interchange fees (MIF), and the EC's Competition Commissioner describes them as "among the highest in Europe." The Commission gave MasterCard six months to drop the fees or face whopping penalties.
MIFs are set at 0.50% on debit and more than 1% on credit card payments, according to the EC. The ruling applies only to MasterCard, because Visa Inc. had previously agreed to the EC's demand to cap similar fees.
Merchant groups in the United States jumped at the opportunity presented by the EC ruling to trumpet their calls for changes in - if not outright destruction of - interchange.
"These fees drive up the cost of merchandise for shoppers while delivering little if any benefit commensurate with the billions [of dollars] charged," said Mallory Duncan, Senior Vice President and General Counsel at the National Retail Federation, in a statement. "It's time for this to stop, and authorities here in the United States should take the European ruling as a signal that it's time to bring the same relief to U.S. consumers."
In its statement, the NRF asserted that interchange collected by MasterCard and Visa banks was expected to exceed $40 billion last year, "or about $350 per household." Since 2001, the NRF stated U.S. merchant interchange has increased 117%. It's unclear, however, exactly how the group came up with its findings.
Earlier this month, Mitch Goldstone, a lead (and possibly the most vocal) plaintiff in a class action lawsuit against MasterCard, Visa and leading member banks, took to the pages of The Wall Street Journal to rally support from the business world. "MasterCard's long history of anti-competitive price-fixing corrupts its understanding of Economics 101, where the marketplace controls competition, not a board of directors," Goldstone wrote in the Jan. 10, 2008, edition.
MasterCard, of course, had its own tough-sounding talking points on the decision and in defense of interchange, suggesting that the EC's Competition Commission doesn't understand the payment card business. MasterCard did agree, however, to halt the fees pending the outcome of its legal challenge to the Commission's ruling.
U.S. merchants are pushing to get lawmakers on their side in this battle, and to that end Congress called at least three public hearings on interchange. Since it's an election year, and the economy is teetering perilously close toward recession, more hearings are likely, especially in the context of helping small businesses and consumers.
Federal legislation seems like a long shot, though, given the amount of time lawmakers are expected to spend in Washington this year. The courts and states are more likely to take on the issue. In fact, a recent report from West Virginia could be a foreshadowing of things to come.
According to a Jan. 16, 2008, story in The Charleston Gazette, the West Virginia attorney general's office has reached a preliminary settlement for $12.1 million with Visa and MasterCard in a lawsuit pending since 2003.
The suit accused the card Associations of violating the state's antitrust and consumer protection laws by forcing merchants to accept their brands' credit and debit cards, and assessing the same interchange for debit and credit, even though, the state attorney's office said, debit cards are less risky, and thus interchange on debit should be priced lower. The state attorney general said the $12.1 million will be placed in trust and distributed to citizens through a series of state sales tax holidays.
It's yet another reminder that ISOs need to expand and diversify the products and services they sell to merchants.
Several seemingly hot emerging trends might fit the bill. These include, but are not limited to: mobile, contactless and Internet payments; loyalty/gift card programs; ACH check conversion; equipment leasing; and cash advances and loan products.
About 10 years ago, I moderated a roundtable discussion that included representatives of some of the leading ISO and acquiring companies in the country at that time. A common theme of that discussion was how to build and maintain "customer stickiness" by becoming a one-stop shop for merchant services. How prescient those discussions seem now in retrospect.
It's not just an esoteric discussion anymore. ISOs and merchant level salespeople who aren't trying to diversify product offerings could be missing out on significant revenue opportunities.
Take contactless payments, for example. A survey last year by Aberdeen Group found 16% of retailers plan to increase spending significantly on contactless payment adoption over the next two years. Sixty-five percent of retailers are anticipating gradual increases in spending on contactless.
Yet a second survey, conducted by Aite Group last fall, suggested that none of the major acquirers consider contactless functionality an important offering for merchants.
Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. E-mail her at patti@greensheet.com.
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