Category: Retail

[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.

costs and interchange, payment cards, retail

Continue reading “The price of everything”

[Dave Birch] I’m still curious about US debit interchange rates, just as I was a couple of weeks ago when I misunderstood a magazne article on the topic. Remember that in the US, PIN debit (which grew out of regional ATM networks) costs less than signature debit, so you would expect merchants to incentivise the use of PIN debit or you would expect signature debit rates to fall towards PIN debit rates. In fact, since signature debit rates (via Visa and MasterCard) have remained fairly stable, what has happened is that PIN debit rates have moved up towards signature debit rates. Looking for some recent figures….

the average interchange cost for a small retailer on a $50 face-to-face purchase processed on a PIN-debit card with a major electronic funds transfer network logo in 1996 was 9.9 cents. By 2007, that same sale generated 40.1 cents in interchange… In contrast to PIN-debit pricing, signature-debit interchange has been stable since 2005… a small retailer in a $50 card-present sale with a Visa check card would pay interchange of 66.5 cents, and 67.5 cents on an equivalent MasterCard Debit transaction.

[From News]

Now, I reckon that the same retailer in the UK would pay 10p for a transaction that they pay 40 cents (30p) for in the US. So, I’m missing something here. Why does a debit transaction cost a merchant so much more in the US? For $50 transactions, setting the cost at 15 cents or 30 cents is not a make-or-break decision. But, obviously, for many merchants (especially in the cash-replacement potential market sector that I am interested in) the average sale is much smaller and a 40 cent charge on a $4 transaction eats up a lot of the merchant’s margin.

The chain’s average ticket is $6, a level at which it’s difficult to make money after deducting interchange, Jones argues. Currently, credit cards account for about half of sales.

[From News]

So unless I’m missing something else about the cost structure, the only interpretation of these figures is that merchants in the US simply pay a much higher fee than merchants in (for example) the UK do. Our friends at Payments News pointed me to a recent report that suggests that that is precisely the right interpretation.

U.S. swipe fees are: more than two times the rates in the UK and New Zealand, four times the rates in Australia, and over six times the cross border rates recently agreed upon by MasterCard and the EU

[From Merchants Publish A Look at Interchange Fees Outside the US]

Why is this gap so big? Surely the US market is just as competitive as the UK market? I read a recent analysis from Peter Jones of Payment Systems Europe — who put the average merchant fee at 1.8% in the US and 0.8% in Europe — and he attributed the difference to the competitive issuing market in the US, with card companies competing to attract consumers by offering ever-higher rewards and charging the merchants for them. You can see why merchants object to this: but what should they do? James van Dyke of Javelin has some sage advice.

Merchants have some valid concerns about the payments industry, but they should push back on their advocacy-group partners and lobbyists on the viability of this interchange campaign. The interchange debate is fundamentally an issue between differing camps of business entities, and to position it as a consumer-advocacy issue will ultimately be fruitless for the merchant community in my opinion.

[From Javelin Strategy and Research » The merchant cost-of-interchange debate: what are the facts?]

Yes, the cost of cards needs to come down. But the way to do this is by encouraging competition, not by whining to regulators.

Continue reading “What doesn’t add up”

[Dave Birch] Having been focussed on some other initiatives for a while, I hadn’t been paying much attention to the contactless roll-out in the UK. However, in the last couple of days I’ve had a couple of interesting experiences. First, I popped into Pret a Manger near Euston to get a latte while I was waiting for a customer. I noticed that they had contactless readers, correctly positioned and apparently turned on. So I paid using my splendid Barclaycard OnePulse card.

That’s the story, basically. A contactless terminal, in a useful location, properly installed and working without a glitch. I paid in a couple of hundred milliseconds and left.

Not everything in the garden is rosy though. Yesterday at Cafe Nero I noticed another contactless terminal, once again correctly positioned and turned on. So I tried to pay using my splendid BarclayCard Cashback card but got the message “not authorised”. Ever vigilant to explore the contactless envelope on behalf of digital money denizens, I tried a couple of other devices about my person (a sticker on the back of an iPhone and a mobile phone) and the terminal read them correctly, so there was no doubt that it was working. I tried my BarclayCard again. “Not authorized”.

I was really surprised by what happened next though. The chap at the till explained to me that contactless cards could only be used a few times before they must be used in a regular chip and PIN terminal (“to make sure that it is really your card”) and invited me to use the contact interface. Incidentally, he also told me that more and more people were using the contactless terminal. That’s a good sign, and it’s from the horse’s mouth, so to speak. I knew the offline no CVM count wasn’t the problem (you get a different message on the terminal) but did it anyway and, of course, the transaction worked perfectly. So having done the chip and PIN transaction, I then bought a cookie (any excuse) and tried to use the card contactlessly again. “Not authorized”. Barclays #fail.

The point of this anecdote it not that one of my cards didn’t work properly but that the retailer had clearly trained the staff properly and they understood how the product worked, which I think is evidence of progress that deserves reporting.

The research conclusions identified merchant acceptance as a critical factor in promoting consumer use of contactless payment technology.

[From Alliance Activities : Publications : Issuer and Merchant Best Practices: Promoting Contactless Payments Usage and Acceptance – Smart Card Alliance]

This is undoubtedly correct, but it’s not just the terminal penetration that is the measure. It’s whether the merchants have trained their staff to exploit contactless properly so that people will be encouraged to give it a try and, when things don’t work properly on occasion, help them sort out what’s going on. Well done Cafe Nero.

Continue reading “Contactless #pass and #fail”

[Dave Birch] One of the most basic dynamics in the retail electronic payments world is the cost of transactions and the comparison of costs from the retailers perspective. If we assume honest retailers (ie, they are accounting all cash transactions and not using them to avoid taxes, enable money laundering and so on) then what is the real picture? It’s honestly hard to say, clearly one factor is that type of retailer and their average transaction size. Another is whether we account the retailers private costs or the total social costs. I think it’s a mistake for regulators to account for the retailers private costs only, especially given my pro-electronic payments perspective! If we only account those private costs then for many retailers, electronic payments will always seem more expensive and therefore it appears that (for example) card users are getting a good deal.

This is clearly unfair to consumers who use cash. They face a higher cost for goods or services through no fault of their own. In a user-pays society, those using a service should expect to pay its full cost.

[From Editorial: User-pays for credit cards fairer for all – Personal Finance – NZ Herald News]

Indeed. I don’t use cash except when I am forced to. So I don’t want to pay for ATMs, police escorts to ATMs, security vans, police escorts, tax evasion and all the rest of it. Surely merchants accepting cash should be required to pay a special tax that goes to the police, the revenue and the customs?

OK, perhaps not. But retailers do complain about the cost of electronic payments, claiming that cash is less expensive. There are, however, businesses that have started to refuse cash. One New York restaurant “Commerce” has looked at the bigger picture and come down firmly on the e- side. The owner Tony Zazula, hereby declared a Hero of the Order of Digital Money (my newly-created elite secret society), takes a robust line. Has has stopped accepting cash altogether and is clear about his strategy.

“If you don’t have a credit card, you can use a debit card,” said the restaurant’s co-owner, Tony Zazula. “If you don’t have a debit card, you probably don’t have a checking account. And if you don’t have a checking account, you probably shouldn’t be eating at Commerce to begin with.”

[From New York Restaurant Loses Its Appetite for Cash – WSJ.com]

Now that’s what I call KYC (Knowing Your Customer). And the abandoning of cash helps with Anti-Money Laundering (AML) as well I should imagine. While Tony’s firm line on the folding stuff may inconvenience the occasional drug dealer or corrupt politician (which might be a reasonable fraction of the customer base in that area!!) it seems to me that both the restaurant and society benefit: the private and social costs fall together.

Continue reading “The way to a mans heart”

[Dave Birch] We’ve all been a bit fed up with NFC recently, having got carried away on a tide of hype that didn’t take into account the complexity of the relationship between banks, operators and manufacturers. This relationship does not seem to have advanced much in last year: the operators want a business case before they order handsets, the manufacturers want commitment before they invest in handset production, the banks can’t see an opportunity without handsets. So no NFC>

As my colleague Neil Livingston pointed out in his workshop at NFC World in Singapore, there are actually a range of practical uses for NFC, beyond payments, where there do seem to be business cases and it was interesting to me that much more of the discussion at NFC World today in Singapore was about consumer electronics opportunities rather than just about mobile-related opportunities. So there are no handsets, but that doesn’t mean there are no NFC opportunities. Nevertheless, we have to be realistic. It hasn’t taken off the way that many had hoped. It’s not because of the consumer proposition. The fact is, however, that in all of the pilots and trials to date, the response of consumers has been overwhelmingly positive. They like NFC. So the fact that some stakeholders have been unable to agree a basis for moving forwards in the co-operative world of “apartment” USIMs, shared TSMs and revenue sharing (GSMA model) is, I think, unlikely to put the brakes on NFC completely.

Continue reading “Where is the next NFC breakthrough?”

[Dave Birch] Speaking at the Cards & Payments Quarterly Thought Leadership seminar, Andy Simmonds of Barclaycard was talking about pan-European acquiring. One of the several excellent and perceptive points he made was that large, pan-European merchants will “take matters into their own hands” unless they get better service from banks. What he meant, I think, was that retailers will either issue their own semi-closed loop payment cards, stickers, watches, hat, badges and whatever else or that they will demand direct access to Visa and MasterCard. Contactless, that well-known Mickey Mouse technology will, I think, have an impact here because it gives retailers and others the ability to move beyond the card format. Let’s face it, cards are a bit boring to the average consumer (as are payments, frankly) and so these alternative form factors may have attractions beyond rational product evaluation, if you see what I mean.

Continue reading “Payments aren’t just about payments”

[Dave Birch] Perhaps it’s an age-related disorder, but I’m finding it harder to understand news stories. For example, I happened across this a couple of days ago:

Visa recently made a change to the fees that it charges retailers-something called an interchange rate-and it means that retailers must pay them a lot more when a consumer uses a Visa contactless debit card. In other words, when a consumer walks into a Best Buy and buys a $300 Blu-ray disc player, the amount of money the retailer gets to keep will differ sharply based on which Visa card that consumer chooses to use. By increasing those charges, Visa is trying to make up for some of the money lost through the new law.

[From The Credit Card Reform Backlash – CBS News]

What? There’s a higher interchange rate for contactless cards and this results in a higher merchant service charge for contactless transactions?

Best Buy pushed back last week (July 16) when it issued a statement to retail technology publication StorefrontBacktalk that was the retailer’s equivalent of a shot across the bow at Visa. Best Buy said that it “is constantly looking at ways to reduce the cost of check lane tender. As part of this exercise, we are evaluating the continued acceptance of Visa-issued contactless payment cards in our stores in light of recent price increases.”

[From The Credit Card Reform Backlash – CBS News]

Does anyone know how much Best Buy pays for a Visa contactless debit transaction compared to, for example, a Visa or MasterCard credit card transaction for a customer purchasing a $300 Blu-ray player? I don’t understand this story, so I was wondering if one of our US correspondents could read between the lines for me. I don’t understand why chains like Best Buy and Home Depot, where the average ticket must be more than $25, are considered prime contactless territory — do people rush in to Best Buy shouting “quick I need a Dolby 5.1 surround sound speaker system!!” and waving their Visa card in front of them?

Continue reading “I didn’t understand this story”

[Dave Birch] Barclays commitment to convert all UK debit cards to contactless, given that they already have a large number of contactless credit cards out there, means that the penetration of contactless cards will go up substantially over the coming year. So what will happen? We have already learned some key lessons. For example, we know that transit has a powerful role to play.

For contactless issuance—card acceptance at transit is a big motivator for issuers. It’s a market that is both high profile and also potentially lucrative for transaction volume. This could definitely serve to motivate issuers to ramp up contactless issuance.

[From Javelin Strategy and Research » ViVOtech, Cubic, Mobile Payments and Transit]

And, in the UK at least, the combination seems to be working in the sense that cards are being issued in large numbers and transit operators are looking seriously at accepting bank-issued cards in their gates. I should note, of course, that is not only bank-issued cards in this environment: there are some new players as well, including Forum friends sQuidcard.

E-money start-up sQuidcard has struck a deal with the Scottish National Entitlement Card (NEC) programme and council authorities in Dundee to provide residents with pre-paid contactless cards. The NEC programme is designed to offer Scots access to council facilities such as libraries, schools, taxis and leisure through a single card. The card can also be used on public transport as well as to access thousands of rewards and discounts… Following the Squid tie-up, users in Dundee will also be able to load the cards with money and make purchases of under £10 in retail stores by tapping them against specially equipped terminals.

[From Finextra: Dundee council teams with sQuid on pre-paid contactless card]

On the other hand, the retailers are not, it has to be said, rushing to convert. This is for all sorts of reasons that are not interesting to go into here. Nevertheless, step-by-step, contactless acquiring is spreading.

UK high street retailer Boots is teaming with MasterCard and RBS WorldPay to introduce contactless payments at stores in London and Liverpool… Boots is the first high street retailer in the UK to trial contactless technology, which is swiftly gaining popularity in the country.

[From Finextra: UK retailer Boots to trial contactless payments]

There are some real issues that need to be resolved: it’s not just conservatism or resistance to new technology. For example, there is the issue of the transaction limit beyond which contact and PIN is required.

Opinions vary as to whether the current limit of £10 is appropriate. Dave Birch, director of the consultants, Consult Hyperion, which has been closely involved in all three of the first contactless payment schemes thinks this is a difficult question. “Certainly there is pressure from merchants who want a much higher limit,” he says. “I think that will take a little while though because the banks need the experience of running the risk management models and anti-fraud systems first.”

[From StorageExpo08 Show Preview: FST]

But I think a bigger problem is that many of the places where contactless cards use would be desirable and convenient are not places where banks currently acquire card transactions, are not places where retail POS terminals are suitable and are not places where telecommunications networks are ubiquitous. So I’d love to pay at Woking rail station car park in the morning by simply tapping my OnePulse card against the machine, but I can’t see how it can happen. Meanwhile, the competition is closing in: Woking now has RingGo mobile payments in place, so you can park and then pay on the train on your way to London. Bank-issued ontactless payment cards are going to have to work harder if they want to get into those markets.

Continue reading “What will contactless ubiquity bring?”

[Dave Birch] We spend a lot of our time looking at technology roadmaps for customers in different sectors, and these roadmaps have a lot of different technologies on them. Obviously one of the key ones is contactless and one of the challenging aspects of turning a technology timeline into a technology roadmap for particular markets is trying to understand the relationship between technology decisions and the business “layer”. Its natural to look around the world for similar examples, to help understand this relationship, but we have to be careful they are not misleading. So, for example, while we may look at (say) the Japanese market and obtain interesting ideas from it, it’s not a template for the (say) the European market. Apart from anything else, it is based on a different contactless standard. It happens, though, that some people think the standard may be coming our way.

The Japanese government’s Ministry of Internal Affairs and Communications has announced plans to work with mobile phone makers worldwide to increase the use of Sony’s FeliCa chip in handsets, according to an Associated Press report. The ministry’s work may help speed the adoption of phone-based payments options in western countries.

[From NFCNews | Government boost for global FeliCa adoption]

Personally, I’m not sure that is the trajectory. There is already a join venture (Moversa) to make NFC chips that work with both ISO and Felica standards, so I think that will do more to spread phone-based payments than the wider adoption of Felica. So, if you look at the phone we are using for the Orange / Barclaycard NFC product, the 6212, it can’t currently interface with Felica. This makes it unattractive in Asian markets where Felica is used for payments and transit, or even just transit. But in Europe it’s no problem, because payments and transit all use the ISO interface.

Continue reading “TV times”

[Dave Birch] One of the Consult Hyperion projects that I’m working on at the moment involves looking at ways to take simple financial services (in particular, payments) out to the less well-off. These people are dependent on cash, and therefore pay much higher transaction costs than the more comfortable members of society. Part of this work rests on the availability of products, specifically pre-paid products, and part of it depends on technology. Unless technology can make payments as easy as cash, it will be difficult to persuade people to give them a try even though they might be financially better off using the new technology. We all understand that customers value convenience. This is one of the reasons why contactless “touch and go” technology in general and the combination of contactless technology with mobile has so much to offer. We have a way of making electronic payments as convenient as cash.

Actually, it seems to me the given certain bounds, contactless technologies can exceed this expectation and deliver an experience that is much better than cash. Paying with an offline contactless product (such as a prepaid card) is quicker than paying with notes and coins (even without having to wait for change) and the fact that a mobile phone can manage “cash” for you is transformational, since we know that one of the key factors in driving up the adoption of prepaid products is the ready availability of balance information.

I tend to think, therefore, that bringing contactless technology into the payments space will do more than make credit and debit card use more convenient. It may well have much more of an impact by driving a wider range of prepaid products into the market and and driving a more significant displacement of cash than either magnetic stripe or chip & PIN have achieved.

Continue reading “Does contactless change the landscape?”