A Finextra member 10 June, 2008, 23:40 0 likes

The issue of card fees increasing is irrelevant to a consumer who chooses not to have a card, unless the merchant inflates the cost of all goods to cover the added expense of the consumers who might make a payment by card (which the merchant must do unless they apply a surcharge for card transactions).

If governments wish to reduce the cost of goods, and merchants wish to reduce their costs, they should apply a surcharge to the cost based on the consumer's form of payment. The surcharge should be clearly advertised, calculated and displayed at the point of sale.

Of course the card companies resist this with victimisation and court action. This is an example of corporate ethics in action, or absence.

Even where a surcharge is legal, it’s generally a violation of Visa and MasterCard’s rules for a store to tack on a surcharge for their credit or debit cards. They define a surcharge as any fee that is charged for using the card that is not charged when another payment method is used. (Note: This rule does not apply when you pay your federal income tax with plastic.) Why would that be? Perhaps the card companies are worried consumers will stop using the cards if they realise how much it costs them on each individual transaction. (Better to keep them in the dark then.)

As for consumers negotiating fees, well they could just cut the card up and send it  back. The card issuers will soon reduce fees in the absence of customers signing up. 

Consumers already have the choice of whether to use the cards or pay higher card account fees. They do not have the luxury of choosing not to subsidise those consumers who choose to use expensive forms of payment - unless the card fee is applied as a surcharge at the point of sale. 

It may be a moot point soon. Cards are dying anyway. It is going to be difficult for existing card companies to achieve success if the main way they differentiate their products on a mobile phone is by having higher fees. I don't expect that will last long, and neither will they. Caught in a rub, really, if they don't go mobile they're dead and if they are priced too high doing it they're still dead, and stuck with all that obsolete infrastructure until the last consumer ditches their card. A shrinking market. Prognosis not good.

There never was a better time for Discover to go hard in the US market - without the cards.  (Discover are consumer friendly, in that they allow merchants to apply a surcharge, so you will at least know what their service is costing.)

Maybe they'll 'Discover' a new way to do transactions and really get the jump on Visa and Mastercard, there certainly are plenty of willing merchants looking for something better.

Jean-Philippe Joliveau - Nexi - Milano 11 June, 2008, 14:49 0 likes

Hi Dean

- 'merchants should apply a surcharge'

I believe this is the right way to discourage the use of cards (you acknowlege this by saying that the option for the cardholder is to cut the card and send it back, which is certainly what they will do). Does this mean that regulators plan to ban card payment? This is not really the case in Europe, where 'war on cash' has been declared and card payment is one (not the only one) of the instruments which should be used to fight it. Regarding the surcharge, there used to be a fee on each payment with a debit card in Italy. The card, however, was free. Debit card payment was confidential. The banks then decided to eliminate the fee and apply (what a surprise) an interchange fee instead combined with a membership fee. The number of cards issued dramatically increased in the following years. So yes, I think consumers would stop using the card, but not because they 'realise how much it costs them on each individual transaction', but simply because there is a cost on the transaction, which is a strong immediate deterrent. And based on this reasoning I think it would be necessary then to put a fee for any type of payment, not just card, and especially cash, measured to the cost of its management which is subsidised by every one of us through taxes.

- 'As for consumers negotiating fees, well they could just cut the card up and send it  back. The card issuers will soon reduce fees in the absence of customers signing up'

My suggestion was provocative. Today, neither merchants nor consumers negotiate interchange fees. Fairness would have it that if merchants are invited to the negotiation table, consumers should also be invited, otherwise they will loose without the possibility to defend themselves (except as you suggest by retreating completely and renounce the card means of payment). It is interesting, though, that you do not propose the same method to merchants. Could we not say 'they could just give back their terminal and accept cash only. The card acquirer will soon reduce fees in the absence of merchants signing up'. But this is not happening, on the contrary, more merchants are signing up to accept cards. And complain about fees.

- 'Cards are dying anyway'

This is a point of view. In that case, though, I am wondering why senator Dick Durbin is bothering?

A Finextra member 12 June, 2008, 05:29 0 likes

Jean-Philippe,

I think this is why the Senator is interested. The merchant associations and consumers are applying significant pressure.

When email is 'free' it seems incongruous to have card processing companies charging significant fees (more than employee wage costs). The costs of sending that few bytes of data around the corner to the bank is just a little unrealistic.

With the coming mobile revolution this may well change and we might see an end to proprietary hardware systems being used to extract maximim dollars from merchants and consumers.

The credit card companies really don't do a lot for their fees (like carry any risk) and I think this has finally come home to roost in the 21st century.

I note that BofA has signed 1 million mobile banking customers. While this number is insignificant it certainly lays the groundwork for the next generation of mobile commerce - replacing the card and efptos networks with merchandising space on merchant's counters and 30%+ net profit increases for merchants.

A 'statement' from Visa and a few numbers from the merchants:- 

“Visa’s average interchange…has remained steady over the last ten years,” Joshua Floum, Visa (House Judiciary Anti-Trust Task Force, 5/15/08).

FACT: “The Visa interchange fee has increased over the past decade to 1.76% from an average of 1.5%. Economies of scale should be driving fees down, as in most other service-fee industries.” Wall Street Journal, 3/29/08.

FACT: No industry has benefited more from improved technology and economies of scale than the credit card industry in the last 10 years. Remember old-fashioned credit card processing machines known as the “knucklebuster?” Now credit card interchange processing is computerized using merchant-provided terminals.

FACT: Yet despite vastly increased volume, more efficient, and advanced technology, credit card interchange fees in the U.S. are higher than ever despite dramatically lower processing costs! Three times what Europeans pay!

QUESTION: So why hasn’t the cost of credit card interchange fees dropped like the cost of everything else revolutionized by computer technology in recent years instead of skyrocketing?

ANSWER: Because Visa and MasterCard control more than 80% of electronic card payments. They are a cartel trying to protect billions in unnecessary credit card fees charged to merchants and foisted upon consumers. For billions in extra credit card fees, you might be tempted to tell Congress whoppers too!

FACT: Credit card interchange fees cost the average American family nearly $370 last year and totaled more than $42 billion. Interchange credit card fees paid by merchants and consumers have more than doubled on gasoline since 2004.

END Quote.

I have received a few hints that merchants are really quite keen on a system where there is virtually no risk for the merchant and the fees are significantly lower. As for the consumer, 100% of our test subjects will happily use their mobile phone for transactions. It's just the credit part which was missing and the solution is at hand.

BillMELater, MoneyAisle and Prosper provide a hint as to what is to come. ATM owners as well as merchants are keen to participate in the cash requirements of such a system. Connect these to a web based POS and Transinteract style mobile transaction system and what do you have? - Apart from reduced cost, reduced fraud, no ID theft...

A revolution in the way we handle our money is at hand. Not that we'll doing it too much different from before but I expect there may be a few less middlemen/fees in the picture.

My last point would be to ask this question:-

Given an assumption that there were no cards in use and no mobile transaction systems in place and I am going to invest $5 billion dollars in a transaction system:

Can you provide me with a compelling argument as to why I would choose to invest in a card based system?

With 4 billion mobiles out there it's a no brainer, seeing $5 billion would provide every merchant in business with a much more attractive alternative. High interchange fees will go the same way - out the door, not necessarily through legislation, but definiteley through market demand and the genie is out of the bottle, there's no stopping it now.

Matt White - Finextra - Toronto 12 June, 2008, 16:41 0 likes

Away from the US battle, MasterCard confirmed today it will comply with the EC's order to scrap fees for intra-EAA cross-border transactions from 21 June.

Hardly surprising considering the Commission threatened back in December to impose daily penalty payments of 3.5% of MasterCard's daily global turnover if it didn't do as it was told within six months.

MasterCard hasn't given up though and says it will continue to pursue the appeal it launched in March.

Still, there's no doubt that they're getting some serious heat on both sides of the Atlantic.

Jean-Philippe Joliveau - Nexi - Milano 13 June, 2008, 08:46 0 likes

Dean,

I am not convinced that the introduction of mobile payments will substantially change the situation of the business. Whether you pay with a plastic card or a mobile phone is not fundamentally different in the process, what changes is only the technology used. The payment process in both cases means you need to transfer funds from an account owned by a consumer to an account owned by a merchant. It does not matter if you use a card or a phone to start the process.

Your view is mobile payment will be free. This remains to be seen, as there are anyway technological costs to set-up and run the infrastructure, and also to guarantee the transaction safely arrives to destination.

Transaction costs may not be a relevant problem in closed-loop systems, where the same operator offers his customers the means to pay at his own merchants. But it is not the same if you want to offer payment services at merchants who are not your customers.

Now you can do that by signing bilateral agreements with merchants, but it is easier if you can link to a network that already multilaterally connects merchants and consumers accounts, especially if your goal is the widest acceptance of your payment means. The concept of payment scheme is born, with an issuer and an acquirer, and both need to cover the costs of the service. For the issuer, this can be done either by charging a fee per transaction or through the mechanism of the interchange fee which transfers the costs to the merchant.

We can discuss whether the level of costs we are talking about is fair or not, whether card companies are unduly profiting from the system or not, it does not change the fact that there are costs involved in processing a transaction.

Email is 'free', but is not a payment transaction. When I send an email, nobody guarantees me that it will arrive at destination (although it usually does) and there is no possibility to prevent it from being intercepted by unauthorised people. This must not happen for a payment transaction which involves money and part of an interchange fee is used to cover the cost of ensuring the transaction is safe, when it is started by a credit card as well as when it is started by a mobile phone. The advantage of starting the transaction with a mobile phone will certainly increase the security level from the very beginning of the transaction but I will still need some network to convey it if I want to pay something with my account in Italy at a merchant in the U.S.

So if you had to invest $5 billion in a transaction system, I would not advise you to invest in a card based system; that is not the point. The question would be to decide whether the system must be global of closed-loop. If it must be global, I am afraid there are not many alternatives in managing it. As you say, 'Not that we'll doing it too much different from before'.