[Dave Birch] It’s all very well for informed observers such as myself to call for a more efficient payment system, but the economics have to work out as well. Given that merchants already feel that they pay too much (whether it’s true or not, that’s what they feel) then finding ways to deliver more value to them has to be a priority in the design of new systems and services. In America, the Merchant Payments Coalition (MPC) have been complaining that the collective setting of interchange fees by Visa and MasterCard is a violation of federal antitrust laws and saying that they favour a payment system that is transparent and open to competition. Well, you might think, what’s stopping them? You can’t help but observe that a decade of growing complaints from merchants, and the ready availability of the core technologies required to create viable alternatives (ie, chip cards, mobile phones and the Internet) no large-scale rivals have emerged. Perhaps the truth is that merchants are happy with the bank-centric payments model and the complaints about interchange ARE just posturing for lower prices after all. Having been at a recent meeting between a bank and some large U.K. merchants, however, I think there’s more to it. It’s not just the size of the interchange fee that annoys merchants, it’s what it’s for. U.S. merchants paid $56 billion in interchange fees last year and small retailers have seen interchange costs jump by 16 per cent a year on average since 2000 but a good chunk of those fees don’t go to cover the cost of the payment plus a profit, they go to pay for frequent flyer miles, cashback and other issuer incentives. In fact, in the U.S., almost half of the interchange goes to pay for issuer rewards.

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So are merchants stuck, at the mercy of a conspiratorial oligarchy, unable to cause or benefit from change? Well, not really. Things are changing in the retail e-payments space, of course. In a survey of the top 100 largest e-commerce sites to see what payments they accepted, acceptance of “alternative” payment mechanisms such as Google Checkout, PayPal and Bill Me Later had gone up 267% in six months, so consumers and merchants are getting more choices. Wal-Mart’s decision to support e-cheques (which they think will save them a BILLION dollars per annum) will presumably cause other merchants to look at the possibility. Apparently a couple of retailers are going to trial BillMeLater in physical stores as well.

The entry of significant new players such as Google must have an impact. Google Checkout is, in fact, quite a useful example because their business model is somewhat different from other payment companies. Google is prepared to run Checkout at break-even, or even at a loss, because it sees the service as a useful way to bring more advertisers to its all-important AdWords business, which charges retailers for search-related “keyword” ads. Checkout has already signed up a quarter of the top 500 online retailers, largely thanks to its offer of free payments processing until 2008. Once the promotion ends, every dollar a merchant spends advertising with Google will entitle it to $10-worth of free processing. This could be more of a window into the future. Just as in the case of DoCoMo, payments is not a business only about transaction fees and revenues but is an integrated part of a much bigger play.

The current situation is not mandated by the laws of nature, but has been formed by a particular set of circumstances. There are people working to change it and the payments cards industry cannot just assume that it will continue to dominate. This isn’t to say that people won’t be playing with cards in the future: they just won’t be cards from their bank. In the US and the UK, for example, it may well be that some kind of identity card (or, more likely, some kind of identity card stored in a mobile phone) becomes a platform for a much wider variety of payment options.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]


  1. Hi Dave. Great post! I obviously totally agree with your comment in the first paragraph stating that “finding ways to deliver more value to them (merchants) has to be a priority in the design of new systems and services.” That is the real key.

  2. I found the article interesting, but am missing something…
    It seemed that the point of the article is that merchants want to reduce the fees associated with credit cards. Google, PayPal, & BillMeLater are the referenced alternative payment methods to credit cards. I haven’t seen any stats, but I expect that 98% of transactions that are paid using these “Alternatives” are eventually paid via credit card (ie I use a credit card to pay for my PayPal “credits”). So, these alternatives do not eliminate credit card usage (therefore interchange fees are still being paid). Further, these alternatives charge a fee for their services, so it’s interchange plus the payment method’s markup (OK, Google can afford to entice merchants to use their discounted service for a while longer).
    The point is that although the payment methods mentioned above are the only alternative payment methods that we in the US consider for online commerce and these payment methods still rely upon the credit card associations.
    I work for a Payment Service Provider that specializes in internationally focused alternative payment methods. Outside the US, credit card penetration and usage is much lower than what we’re accustomed. Internationally, customers are using bank based payments that offer merchants a low, fixed fee associated with the transaction (and some with no fraud reversal possibility). Let me know and I can send some info; I believe this is the future for “real” alternatives to credit cards and will solve the “problem” merchants have with interchange fees…
    PS – I failed to mention that internationally, merchants can penalize customers for using certain payment methods (credit cards cost $X more). Until I’m penalized, it makes financial sense to use my credit card, accumulate points & interest as I pay the next month…

  3. Very informative and much food for thought.
    I’d always wondered why interchange was so much higher in the US than Europe. I’m guessing from the above that issuer rewards must be the driver – they must give out loads more airmiles States side?
    Google Checkout is certainly innovative in linking marketing cost with payment processing.
    I’m not sure though that PayPal qualifies for alternative status. It was effectively an online card processor and now has become a full service bank. It’s a RBS/Worldpay/Bibit all rolled into one. They were notionally on the outside but are now a fully signed up member of the VISA/MC cartel.
    The cartel will continue well into the forseeable future. There is loads of innovation out there but it wll not dislodge a 25 year old cartel which is supported by the all the issuing banks. The national clearing schemes even appear to be giving up and joining the club.
    The cartel is a benign dictatorship. It delivers a good product but at dictatorial pricing.
    We must learn to live with it.

  4. High interchnage rates are a myth. Lets see you put up your beloved cash in the middle of a transaction for nothing. Monopolies and conspiratorial oligarchies are misnomers. There are thousands of banks/companies in the world that can issue or acquire. Last I heard barrier to entry in banking business is just about nil.

  5. Nasser
    Cash already sits in the middle of 60% (UK) to 90% (Italy) of all retail transactions.
    The interchange fee is zero. Central banks don’t it on cash.
    The bank processing fees average less than 0.20%
    Banking barriers are called regulators!That and the capital requirement hardly amounts to nil!

  6. I agree with Liam’s thoughts, it is just near to impossible to set-up and successfully launch an alternative payment concept (either totally or at least largely unrelated to card-based payments). Gradually, in (continental) Europe you do see a shift from bank-based payments towards Cards with growing overall penetration of Credit/Debit Cards and other MC/VISA products (prepaid or gift cards). At the end of the day in 8 out of 10 transactions it is a card that gets charged, regardless through which system the payment has been accepted. Unless you start re-inventing money itself you will not seriously come up with a truely innovative payment scheme. All systems I know of and worked for had to build their business case around and in consideration of the CC-organisation’s fees. MC/VISA are both in a comfortable position to dictate fees since they are the closest to an open-loop payment system after cash. You want to accept payments on the Web, you have to use their “tools”.

  7. Perhaps PIN debit is 0.20% in Europe. I wonder what is the Interchange be for E Commerce. 0.20%?

  8. I actually do some work with the MPC and I think they are completely right about interchange fees. Many small businesses here in the US are forced to raise prices because of these fees because they really dig into profits when you depend on small purchases. Gas stations are a good example of who was really taking a bit hit because of the popularity of credit cards. On top of that interchange fees may pay for rewards programs, but rewards programs are there to get people to pay more interchange fees – which are now where they make most of their money now.

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