GS Logo
The Green Sheet, Inc

Please Log in

A Thing

GS Advisory Board:
Interchange: Will regulation or competition drive down pricing?

The buzz over interchange is not limited to the courts and the halls of Congress. Merchant-controlled payment schemes such as the POS debit network Debitman have emerged as lower-cost alternatives to bankcards, and some say a competitive force that will eventually drive down interchange. (Among the latest retailers to accept Debitman: Wal-Mart Stores Inc.)

We posed the following questions to members of The Green Sheet Advisory Board:

Do you think competition alone can drive down interchange pricing? Is Debitman (or any other nonbank debit card) the type of market response that's preferable to court-imposed or Congressionally mandated pricing models? Do you expect these programs to have a demonstrable effect on interchange pricing?

And finally: You're a merchant level salesperson (MLS), pummeled with complaints from merchants over the latest round of bankcard interchange increases. What do you say and do in hopes of keeping these merchants from shopping for better deals?

Here are their responses, listed in alphabetical order:

Clinton Baller,
PayNet Merchant Services Inc.

"Competition can drive down the price of anything. But the competition that MasterCard International and Visa U.S.A. face is not so much from other card networks as it is from other payment mechanisms.

"Compare all the costs and benefits of card acceptance with all the costs and benefits of cash and check acceptance (the primary competitors of card payments), and the value of card acceptance is clear: Cards offer convenience and increased sales, among other benefits that cash and checks don't offer, at a cost that is hardly more than the cost of cash and check acceptance.

"Critics of interchange tend to be merchants with a narrow, and natural, self-interest in reducing costs. But their arguments are shallow and will not be joined by those with a broader view of economics. Merchants who complain about interchange fees complain about all their costs and shop for the best deals on everything. You can't stop them from shopping, but you can educate them about the level playing field on which all processors play."

W. Ross Federgreen,

"The question is very complex to answer. First, do I believe that competitive forces will drive down the effective cost of interchange? The short answer is no. Upon examining the Australian experience, you will find that the reduction in interchange led to a pass- through of additional costs to consumers. "Further, with the recent ruling which allows banks to issue American Express cards as well as traditional Association cards I believe that this will keep interchange stable or possibly increase it.

"I would strongly suggest that all interested parties familiarize themselves with the proceedings from the Federal Reserve Bank of Kansas City's conference ['Interchange Fees in Credit and Debit Card Industries: What Role for Public Authorities?'], held last year in Santa Fe, N.M.

"As to the last question, MLSs need to tell the truth, and they must learn what the truth is."

Alan Gitles,
Landmark Merchant Solutions

"As both a lawyer and credit card executive, I believe the courts will have a lot to say about the future of interchange; it now seems unavoidable. The lawyers are taking over after the large Wal-Mart settlement. I expect competitors like Debitman to have a small impact on pricing but not nearly as large an impact as litigation will in the future."
Jerry M. Julien,
Equity Commerce LP

"Competition alone has already begun to drive down the pricing for years and will continue to do so even without court or congressional mandates. The profit margins continue to shrink as the market becomes more and more inundated with new ISOs and agents who give away pricing due to lack of sales experience.

"Also, as merchants become more familiar and savvy with how and what interchange is and [how it] works, they are becoming tougher negotiators. This is forcing more sales proposals and merchant rates to be set at pass-through pricing with basis points instead of using the three-tiered qualified, mid-qualified and non-qualified pricing model.

"Another area driving down the pricing is agents who get paid an upfront signing bonus and receive either minimal or no ongoing residual payment. In this scenario agents are going to typically give away the pricing at or near cost to get their signing bonus. They are less interested in profit margins since they will not benefit from it in the long run. A good example of competition driving down pricing, but in a different format, is the old days of making tons of money on terminal leases. As we have seen, that market continues to dwindle and is a tough sell as terminal prices continue to drop and new terminal vendors enter the market with inexpensive equipment.

"The public opinion, pressure, and the possible court or congressional involvement/mandates ... will lead to the industry and all agents to provide full disclosure of interchange rates, fees and operating regulations. The fuzzy math sometimes used to drive certain transactions into lower tiers and increase profits (after promising a merchant a low qualified rate then limiting how many of their transactions will actually qualify for that low promised rate) is one area that brings scrutiny to our industry and will need to change if we do not want court or congressional involvement.

"The ongoing lawsuits and the fallout and ramifications from them will continue to form new policies, procedures and shake many things out in the upcoming days, weeks and months.

"The recent announcement of Discover allowing merchants to now pass surcharges onto consumers to offset cost is the most recent example of an unprecedented move, and surely more will follow.

"We provide our merchants with a copy of the interchange rates and work to educate them (and all of our agents) to understand what these rates are and the reasons why transactions will qualify at different rates.

"We also provide full disclosure of all other ancillary fees such as statement fees, monthly minimums, etc., so there is no confusion or surprise when merchants begin processing and receive their initial statement.

"Good agents fully disclose the interchange rates, educate merchants as well as explain who they are as an ISO/agent at the time of signing and with each compliance release. This will help reduce complaints from their merchant base.

"Regarding the Debitman or other nonbank debit cards: There will always be continued efforts to create a closed loop, 'on us' system (similar to how the gift and loyalty card program works) by ISOs and processors in an effort to reduce their costs of processing transactions through the Associations' networks and subsequently offer lower pricing to their merchants.

"First Data has been attempting and working on this scenario for a while, since due to their size, they own the issuing, acquiring and banking relationships."

Lazaros Kalemis,
Alpha Card Services Inc.

"The arrival of Debitman or any other like card will not drive down interchange. The reasons for this are that we Americans like and prefer to use credit cards. In a capitalistic world there isn't any business that reduces or limits its profits. The only way I see the Associations reigning in interchange is if it is court imposed. This is what happened in Australia, and it cut interchange basically in half.

"As I say to many of our merchants, someone has to pay for low interest rates, rewards points and other benefits from the use of credit cards. It isn't fair, but it drives people to use their cards more. In my belief, the only relief or reduction in interchange will come from some kind of court ruling.

"I in no way, shape or form believe regulation would be good because it will reduce the willingness of the issuers to create new programs for their cardholders. Their incentive in creating any new card types or programs will be limited if their potential profits are limited by a reduced interchange benefit."

Allen Kopelman,
Nationwide Payment Systems Inc.

"Most merchants don't care about interchange nor do they all read the newspaper. In fact, when merchants received the notice from the lawyers from the Wal-Mart settlement with paperwork to fill out (with figures like $100 or $6.92, etc.) most of them threw it in the garbage. Out of all the merchants we have, two got back a significant amount of money over $10,000.

"Merchants will continue to complain about pricing no matter what goes on. They want everything for free: free paper, free equipment, free from any fee they can get you to waive. And as long as these 'super ISOs' keep giving away equipment to build portfolios, it will keep going. MLSs who have been in the business know that they don't have to give it away to get business, but it will still be the buzz. While Wal-Mart did make a deal with Debitman, I have not seen Wal-Mart advertise it in the papers or in the store. I have not seen any signage at all in the stores. It is not easy for the consumer to use Debitman; they have to set up an account, and money has to be transferred from their bank account or a credit card. So, what is the advantage? Advantage to Wal-Mart and merchants, disadvantage to the consumer.

"Who knows if Congress is going to be able to do anything about interchange; [Congress] might force Visa and MasterCard to simplify it. If I were Visa and MasterCard, I would say to Congress, 'We did a great job of building our brand, and if anyone else wants in they can get in. If merchants don't like credit and debit cards then they don't have to take them. We are not holding a gun to their heads. We did a great job in building our brand, and consumers like it and use it.'

"Merchants complain about American Express rates, too. These are mostly restaurants that have to pay 3.5% and a transaction fee if they don't have equipment and/or software that can do a split dial. Merchants complain every day, but most of it is caused by untrained salespeople telling merchants they can get a rate of 1.33% or telling a MO/TO merchant, 'Your rates are high; I can get you a 1.75% rate.' Then if you know your business and your merchant trusts you, they call and you tell them that if those were the rates, everyone would have them.

"Interchange is the level playing field; we all start off with the same basic costs, interchange, dues, assessments and a communication fee. At the end of the day the salesperson who explains it best gets the deal. Any company can come along and offer a credit card and attach no fees or fees to the card. Visa and MasterCard have been very good at building a brand and have millions of cardholders. We have American Express, Discover, Diners Club and JCB.

"Most merchants that take AmEx hate them as much as they hate Visa and MasterCard due to the high fees. And merchants who are in business to do business don't complain; they have proper profit margins built in to handle all the card fees. Discover has high fees, too, with a discount rate and an $0.08 transaction fee on top of the transaction fee being charged by the salesperson.

"And if there was going to be another strong card out there, why didn't that company buy Diners Club? Instead, to gain more acceptance Diners [Club] is now part of the MasterCard network."

Douglas Mack,
Card Payment Systems

"I don't know that competition alone will drive down price. It seems to me AmEx and Novus entering the issuing market at a bank level threatens to increase interchange, as a bank could choose to earn more from the cards it issues.

"So while these independent networks are great for the owners/merchants, why would a consumer want to use them if there are not the same 'rewards' for using another bankcard?

"For example, prior to obtaining a couple different rewards cards, I would gladly pay our vendors with a check. Now, I have found myself pressuring some into accepting a card that rewards me with points or cash back. In other words, they can be accepted everywhere, but if no one is using them, what competition is there?"

Steve Norell,
US Merchant Services

"Nonbank-type products, such as Debitman, will not be enough by themselves to drive down interchange. There are only two things that will drive down interchange. One is if a very, and I mean VERY large majority of merchants stop taking credit cards for a long period of time. They can't just do it for one day a year or one week, but they must be ready to go the distance.

"Knowing how today's consumer has a love affair with their credit card or check card this is very unlikely to happen. The second is that the government mandates it. The odds of that happening have a much better chance to succeed.

"I have heard and read about Debitman for several years, but I have yet to see it or have merchants request to be able to have their terminals accept it. Look how long Visa and MasterCard have taken to build their brands into the 800-pound gorilla.

"By the time a new card type with lower interchange becomes as successful as Visa and MasterCard, I will most likely be playing golf every day with the rest of my 90-year-old friends.

"When the merchant gives us grief I have a library of articles and documents that show clearly it has nothing to do with us but rather with Visa and MasterCard, not to mention the banks which invariably tell Visa and MasterCard what to do. It does not hurt to show [merchants] the interchange charts with the rates.

"As far as shopping for a better deal, I can demonstrate that we all pay the same interchange and D&A [dues and assessments] and we are all within pennies of each other on authorization and settlement. If they feel that they have to switch, I can't stop them, but the next interchange increase they will be hitting their provider, and I will get them back."

Dave Siembieda,
CrossCheck, Inc.

"Interchange fees are a hot topic with merchants these days, and many are joining together to sue Visa and

"MasterCard for alleged collusive practice in setting their interchange fees. The introduction of new payment networks has been spurred on by this dissatisfaction with interchange and will probably produce some positive results for merchants in the long run.

"For years we've been reminding merchants that it is important to provide customers a choice of payment methods.

"Well, now it's important that payment providers offer merchants a choice of programs. This will help keep fees reasonable and will best serve their customers. Certainly this competitive response will be preferable to a government-mandated model that can't possibly work to serve the needs of all merchants. One size just never fits all.

"Instead, driven by pressure from merchants and the retail associations, along with the increased demand by card-using consumers, we'll see some flexibility in pricing in the near future. The payments industry will respond with new programs and technology that will provide more convenience, more options and more protection to merchants and consumers.

"MLSs need to first ask themselves if they are providing their merchants with the best service possible. As any good salesperson knows, it's not just about price, so make sure you're offering merchants programs that fit their needs or check to see if their needs have changed and respond accordingly.

"Ask if there are additional services such as gift cards or check guarantee that can help their business grow and then make sure you have [these programs] in your suite of offerings. By providing quality service, a depth of offerings and the programs merchants need to keep their business competitive, you'll keep more business yourself."

Dan D. Wolfe,
Barons Financial Group Inc., and Teledraft Inc.

"It is my hope that more competition will address the merchants' concerns. We are finding it more and more difficult to address the continued price hikes.

"I am sorry that Visa lost in court.It has cost our merchants dearly. I'm concerned any time the government messes with any business as it usually turns out bad. Getting something done isn't getting something done right."

Article published in issue number 060302

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.
Back Next Index © 2006, The Green Sheet, Inc.