For a report entitled, The credit card industry: Between a rock and a hard place, Aite Group LLC surveyed card issuers and processors, ISOs, acquirers and technology vendors about top industry challenges. As the title of the study suggests, the research and advisory firm found that the industry has reached a crossroads.
Twenty-three payments industry insiders participated in the study. Based on the respondents' answers, Aite concluded that the competing interests of different constituencies have paralyzed the industry, "with no clear path out."
The report found that:
One problem Aite found amounts to a technology tug of war. Adil Moussa, Aite Senior Analyst and author of the report, said, "You have the networks that are pushing in one direction and the merchants are pushing in the other and the POS makers are in the middle."
According to Moussa, merchants want more functionality from their POS terminals, and are turning to PC-based terminals that support transactions but also help manage inventory and other business functions. Meanwhile, POS providers are pushing contactless terminals.
"Merchants don't care about [contactless]," Moussa said. "And, at the same time, the only reason why there is so much pressure and why the networks are pushing for the RFIDs is because they are hoping to capture cash transactions and small-ticket cash transactions, like $5, $6, $10 types of transactions. And they're hoping that [contactless] is the way to do it." But merchants dislike small dollar purchases made using card payment methods because they have to pay interchange on them, Moussa noted.
Additionally, consumers have not clamored for contactless payments, according to Dick Bloom, Senior Director, Retail Payments Sales and Service for Posdata, a division of Control Solutions Inc. "Although [Visa Inc. and MasterCard Worldwide] put a fair amount of effort into getting acceptance, it doesn't really seem to be being accepted by the consumer," he said.
While Bloom foresees the development of RFID in the political sector and places where it's mandated, the cost of converting POS terminals to contactless terminals is another deterrent to its implementation for merchants.
The Aite report cited "imbalanced interchange," and the confusion that imbalance causes for the merchants, as a top challenge for debit card issuers. Moussa said many merchants don't understand the difference between PIN debit and signature debit pricing. On small-ticket transactions, the flat PIN debit fee is a greater amount than the percentage-based fee for signature debit.
"I believe that it's been very difficult for the merchant to push the consumer [to signature debit]," Bloom said. Merchants are driven by consumer demands, and most consumers demand ease of use. He said consumers don't want to have to think about using different methods for different price points.
The Aite report predicted that the networks would react to the huge increase in debit use by increasing interchange for debit transactions.
Card networks were seen by those surveyed as adequately insulated from economic pressures because of their ability to raise the fees charged to acquirers and issuers.
Moussa said the networks increased the authorization fee almost 300 percent in 2009. "They're not charging the merchant, they're not charging the consumer directly, so there's no pressure on them [to stop raising fees] and plus, they have a monopoly," he noted. According to the report, "some panelists even questioned the role of card networks and whether that role justified the fees they charge."
Survey respondents said that the three main challenges merchant acquirers and ISOs face are:
The report said business challenges included: commoditization, margin compression, differentiation, merchant insolvency and merchant attrition.
Moussa said ISOs have to contend with the effects of economic upheaval, as well as interchange increases. Merchant acquirers seek to board new merchants as a way to increase revenues, but the bad economy has hindered new merchants from entering the marketplace, he said.
In the current business climate, merchants are not as willing to leave processors, he added. In effect, Moussa believes acquirers are stuck. But he puts forth an alternative strategy that he said acquirers have yet to take advantage of.
"You cannot create new merchants," he said. "But the only thing you can do is try to capture market share - existing merchants that are taking cash, and that are taking checks, and find a way to help them convert those cash transactions and check transactions into electronic transactions.
"The way I see it, merchant acquirers haven't done anything at all to increase market share. Nothing. They do a lot to just go after new merchants, but I haven't seen them spend a single dime on trying to convince merchants to turn more of their cash transactions into electronic transactions." Moussa suggested merchant acquirers and ISOs could follow the issuers lead and offer incentives to merchants in the form of rewards for volume of transactions converted from paper to electronic.
"ISOs and acquirers don't really care that much from the revenue standpoint about interchange," Moussa said.
However, when Visa and MasterCard increase interchange, a shift occurs in merchant accounts that month and the following one, which disrupts business, he said.
Seventy percent of the respondents thought interchange would remain steady in 2009. However, 35 percent of the executives surveyed expected interchange to increase in 2010. Bloom believes that, if interchange does increase, merchants will have to adapt and somehow recover those costs.
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