The Green Sheet Online Edition
October 25, 2010 • Issue 10:10:02
Insider's report on payments
Interchange: Matching loyalties and realities
Are card payments under attack? It's beginning to look that way. First came the 2005 out-of-court settlement by MasterCard Worldwide and Visa Inc., in what has come to be known as the Wal-Mart suit, in effect admitting that retailers had been overcharged interchange.
Then there was the Durbin Amendment, that pesky requirement added to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act that gave the Federal Reserve Board authority over debit interchange.
Now comes news that Visa and MasterCard reached a settlement with the U.S. Department of Justice that deep-sixes long-standing prohibitions against merchants steering customers to alternative methods of payment.
This is not the first time Visa and MasterCard have been on the receiving end of DOJ investigations. In 2001, the DOJ won a long-running case that challenged rules prohibiting MasterCard and Visa member banks from also issuing nonbank cards, like Discover Financial Services' card.
Retailers were jubilant upon learning that Visa and MasterCard had capitulated to DOJ demands that they eliminate rules and practices that block merchants from offering discounts for cash or lower-cost card transactions. (The celebration was tempered somewhat, however, by news that American Express Co. would fight the DOJ in federal court rather than sign off on a similar agreement.)
Mallory Duncan, Senior Vice President and General Counsel at the National Retail Federation described the Visa and MasterCard settlements as a "landmark step" in retailers' efforts to force changes in the interchange pricing model. "Allowing merchants to offer a discount for lower-cost forms of payment will begin to inject competition to the credit card market," Duncan insisted.
Of course, counter-arguments could be made that the DOJ settlement will actually take the steam out of retailer efforts to coax additional interchange legislation, since retailers now have the power to promote cheaper methods of payment, like debit cards.
Retailers are allowed under a decades-old federal law to offer discounts for cash and other preferred methods of tender at the POS, but card company rules have made it exceedingly difficult for retailers to do this. In retrospect, it would seem those rules did more harm than good by fostering an "us and them" mentality between retailers and the card companies.
Listening to retailers rail against restrictive card brand rules for the last 15 years, and the responses from Visa and MasterCard, I've been reminded of a skit Lily Tomlin often performed on the 1960s sketch comedy television series Rowan & Martin's Laugh-In.
She played an obnoxious telephone operator named Ernestine who would often respond to complaints about service with a terse, "We don't care; we're the telephone company." Tomlin was expressing a sentiment we can still appreciate today: people get grumpy when choice gets bulldozed by corporate greed.
I've listened to the arguments presented by the card brands, too, and I'm not convinced as they are that retailers can or should look at card acceptance as just another business decision, especially when one considers the restraints on using cards in ways merchants may want to in order to stoke business (for example, discounts for cash).
If a clothing brand came along and offered a merchant a line of dress shirts on the condition that the merchant never sell the items at a discount, the merchant could refuse the deal and walk away with minimal (if any) consequences.
It's not the same with bankcards because Visa and MasterCard have spent billions of dollars over the years convincing consumers that it's better, faster and smarter to pay with plastic than it is to use checks and cash. This, in turn, has created a consumer expectation that every merchant accepts cards for payment and a sense of diminution for those that don't.
This argument seemed especially disingenuous when in 2005 the brands revamped interchange rate schedules to maximize interchange on particular types of cards (for example, those tied to rewards programs), making it ever more difficult for retailers to control their transaction costs.
Retailer assertions that interchange intervention is pro-consumer are equally disingenuous. "This is a huge win for Main Street merchants and consumers," Tom Robinson, President of Robinson Oil Corp.'s Rotten Robbie's gas station and convenience store chain, was quoted as saying in a press release from the National Association of Convenience Stores following the Oct. 8 news of the settlement.
Yeah, like the savings that accrue to retailers from reductions in card processing costs will show up at the checkout, not just on the companies' bottom lines.
I recall a retailer being asked during a Federal Reserve Bank of Chicago seminar a few years ago if he could quantify consumer savings were interchange to be reduced. He responded that it wasn't easy to quantify and suggested any savings might be too insignificant an amount. It might, for example, only move the price of a soda from $1 to 99 cents, he noted.
New interchange paradigm
Interchange has always played an important role in card payments. And until the two brands went public, interchange at both Visa and MasterCard was set by panels of bankers, because, after all, these were bankcard associations. Now that MasterCard and Visa are publically traded companies, bankers have little direct input into the decision process; only about half of the members of each company's board are affiliated with banks.
Can anyone tell me why it is, then, that acquirers and ISOs continue to place their loyalties behind Visa and MasterCard? These companies may run the networks that authorize and settle bankcards, but MasterCard and Visa are no longer bankcard companies; their loyalties are to stockholders.
It's time for banks and their partners in the card sector to take control of the interchange debate.
Acquiring is no longer a business that can be sustained by interchange. Like most other aspects of banking, it's a business built on relationships. Successful relationships come from well-rounded product and service offerings and good uptimes.
Acquiring is about being available to customers 24/7. It's about thinking ahead - for ways you might help clients grow their businesses, save on processing fees and improve cash flow.
Pricing is and will remain for the foreseeable future a sensitive issue with retailers. But if you're giving clients excellent service, treating them fairly and understand their business issues, most will not change providers to save a few basis points on card processing.
Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. She is also the founder of InsideMicrofinance.com. Email her at email@example.com.
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