[Dave Birch] I've just read a couple of pieces about pricing: the Chicago Fed's Letter 266a (September 2009) "Payments Pricing: Who Bears the Cost?" and the SPEED piece by the Deputy Governor of the Bank of Finland, Pentii Hakkarainen, "The future of retail banking: more competition needed". Pentii says that one challenge (to retail banks) is the "dependence of banks on cross-subsidisation, especially of payment services". I agree and I'm not sure that the magnitude of the cross-subsidy from efficient e-payment methods that (because of SEPA) are going to deliver less margin to the least efficient paper and metal methods is appreciated. So the regulators are pushing down the amount of money available for subsidy but will (of course) go beserk if any attempt is made to remove the subsidy.

One way in which they are reducing the amount available to subsidise cash is by pushing interchange fees down. Setting aside whether that's a good thing or a bad thing, it's certainly a thing. Earlier in the year, there was a Federal Reserve Board report "Interchange Fees and Payment Card Networks: Economics, Industry Developments and Policy Issues" that looked at the situation (in the US at least) in some detail. Amongst other observations, it noted that with respect to interchange fees:

  1. In general, an efficient interchange fee is not solely dependent on the cost of producing a card-based transaction nor is it equal to zero.
  2. An efficient interchange fee may yield prices for card services to each side of the market that are “unbalanced” in the sense that one side pays a higher price than the other.
  3. The efficient interchange fee for a particular card network is difficult to determine empirically.

I think the last point is worth emphasising. There doesn't seem to be any reason to suspect that regulators should inherently know what the correct level of interchange should be. It follows, I think, that if the regulators believe that interchange is too high (for whatever reason) then the appropriate path to correction is increased competition.

Remember this from a couple of months ago?

At a 7-Eleven in a blue-collar neighborhood in St. Louis, the owner, Mike Foster, is hoping the petition in his store will help convince Congress to approve curbs on interchange fees. He said he can make adjustments to curb other expenses in his store, but he cannot do anything to change interchange fees, which cost as much as much as $1,600 a month.

“It keeps getting bigger and bigger and bigger,” he said. “And I got zero control over it.”

[From Card Fees Pit Retailers Against Banks – NYTimes.com]

Zero control? No, Mike. There's at least two things you could do: you could not accept cards, and watch your customers go next door, or you could start your own payment card like Starbucks or, for that matter, like 7-Eleven in Japan where there are several million of their nanoco contactless electronic payment cards in use.

So what is the real dynamic? Many people might sympathise with the retailers' central complaint, that interchange has not evolved to reflect the modern retail payment environment, while being sceptical that a regulatory transfer of resources from one group (banks) to another group (retailers) will result in any benefit to the consumer.

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

2 comments

  1. Right. The interchange fee debate comes down to whether you trust the card schemes/issuing banks or the retailers to use that money to improve customer experience, whether in terms of lower prices, increased selection or other service improvements… Of course, the card schemes seem able to avoid the impact of interchange reduction by simply raising/creating other fees. Nice position to be in, and I guess one reason the MasterCard CEO tops this list: http://www.chiefexecutive.net/AFG/2009/CEOAFGSP.aspx

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