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For a typical transaction ($50), the interchange might be to pay any given set of transactions without penalty, the
87 cents, dues and assessments payable to Visa would be 7 typical credit card accrues interest at 2 percent a month.
cents, and card markup to the processor might be 20 cents. This is twice what the bank can get in the investment
So the effective rate paid by the merchant would be, in this market for short-term funds.
case, 2.28 percent, a typical card present/card-swiped rate.
Total fees would be $1.14. The handful of banks dominating this business would
be better off reducing the current interchange rate by 50
You might ask why issuing banks would receive 76 percent basis points. Here's why: in the not too distant future, a
of merchant fees simply for issuing cards to consumers. challenger (Apple Pay?) will build another set of railroad
This question is even more relevant today. Chances are tracks from merchants to the issuing banks.
good the issuing and acquiring bank in a transaction are
one and the same, since the majority of credit cards are Processors will need to settle directly with perhaps only
issued by Chase, BofA, Citi, Capital One, US Bancorp, and a dozen major issuing banks and one omnibus settlement
Wells, which are also the major acquirers. bank for everyone else. The transactions will go directly
to issuing banks in real time for authorization. No other
Then there is the question of why these fees keep going processors or intermediaries will be involved. Issuing
up, when every other form of electronic processing banks will use next-generation artificial intelligence to
and settlement has seen prices decline. We are seeing a do credit scoring on consumers in real time, which will
movement to faster payments, which means same-day reduce bad-loan charge-offs by 50 percent, or more. There
payment, since all checks and ACH entries now settle in will be no justification for issuing banks getting a fee of 87
one business day. The number one thing most merchants cents for a $50 transaction.
want is to be paid the same day, which is why merchant
cash advance has been successful. When it comes to Let's not pretend the card brands are going to provide
issuing, the average American with a card is revolving exciting, new payment innovations that will justify their
a balance of $16,425. About 60 percent of cardholders fees for basically being toll booths. New initiatives such as
revolve their balances, up from an historical figure closer Verified by Visa and the Visa program to convert checks
to 50 percent. The cost of funds for a major bank is in the 1 to ACH evince minimal accomplishment. The recent EMV
or 2 percent area (the Fed funds rate as I write this is 1.25 rollout has been a boondoggle that should (but probably
percent). The bank will charge consumers a rate of 14 to 22 won't) cause heads to roll. When there is a monopoly (or
percent to revolve balances. duopoly) slack abounds for failed projects. Now EMV is
being touted as a five-year rollout, which is certainly not
New payment rails coming how it was portrayed originally.
A 2015 study by the Federal Reserve calculated that the
return on assets for a typical commercial bank is 1.36 I give interchange as we know it no more than five years.
percent; for large issuing banks it is three times that: 4.36 After that, transactions will settle directly to demand
percent. While, legally, banks must give consumers 20 days deposit accounts, where all payments settle ultimately
anyway. Payment processing
will become a commodity, and
it will be, to use the current nom
de jour, "frictionless." There will
be no more room for an extra 50
basis points, and frankly, there
shouldn't be now.

Brandes Elitch, Director of Partner
Acquisition for CrossCheck Inc., has
been a cash management practitio-
ner for several Fortune 500 companies,
sold cash management services for
major banks and served as a consul-
tant to bankcard acquirers. A Certified
Cash Manager and Accredited ACH
Professional, Brandes has a Master's
in Business Administration from New
York University and a Juris Doctor
from Santa Clara University. He can
be reached at brandese@cross-check.
com.

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