Another side to interchange

Your recent issue highlighting interchange ["The Interchange Roadmap," GSQ, Vol. 9, No. 1, March 2006] was certainly timely. Realizing that The Green Sheet is primarily a publication for the acquiring business, I think it would be interesting to point out some issuer points, from a bank that is an acquirer and an issuer.

Many businesses have long forgotten the huge advantages that MasterCard and Visa brought to them in the late 1960s and 1970s by the acceptance of the two cards as another means of selling their goods and/or services.

Prior to the introduction of these cards, a business had only two means of selling its wares: cash or check, unless it ventured to carry its own receivables at an overall expense of approximately 10% of sales.

Since these early days, issuers have ventured out to issue to higher-risk cardholders. This also creates a new group of buyers for the acquiring merchants. In today's competitive retail environment, acceptance of these cards is certainly critical to the small to medium-size businesses.

From the acquirer side, I do have to say that interchange may be a little high, but one thing that is certain, MasterCard and Visa have managed over the years to make interchange much too complex and expensive to track and price (approximately 60 tiers of interchange each).

This business would function much more efficiently with very few tiers of interchange (maybe standard, card not present, card swiped, offline debit, online debit, etc.).

MasterCard and Visa historically have introduced card products that all issuers have not embraced. To provide an incentive to these issuers, the Associations prop it up by increasing the interchange on the product. If products were introduced that the issuers truly wanted, this would not be necessary, but there again they would not need the huge expense of their overwhelming marketing and product divisions.

After 36 years in the card industry, I don't profess to know what the interchange rate should be, just that it could be much simpler and more cost efficient for all of us. Continue to keep the issue alive, and one day, maybe MasterCard and Visa will do some things that fit best for their acquiring and issuing members. Thanks for a very informative issue.

Bill Shaw
President, First Citizens Bank, NA

Bill:

Thank you for a thoughtful and insightful letter. Interchange continues to confuse and confound many, even industry veterans. We always like to hear another side of the story and certainly appreciate your input.

Editor