Big Gulp or Big Stick: Government control of credit card fees? Legitimate request or hypocrisy, who’s a congressman to believe?

Commentators cried hypocrisy as Retailers lobby congress to slap price controls on interchange fees. Their point, how can an industry that complains about costly government mandates in other areas like health care now look to Uncle Sam and ask that interchange fees be regulated.  It’s a good question. Meanwhile MasterCard cried foul as 7-11 presented 1.6 million signatures as a part of their “Stop Unfair Credit Card Fees” These two goliaths presented two very different view points with one saying that the petition represents “overwhelming referendum for Congressional action” while the other says that “consumers where mislead by the petition

The key point missing from the argument is: Why do consumers choose a method of payment. Lost in the conversation is that the consumers make these decisions in a highly competitive environment.  The latest information suggests that 45% of current interchange fees are directed to credit card promotions and co-branded credit card loyalty programs. What is happening is that retailer’s profits are being used to promote the use of the bank card. Retailers may be better served by focusing on the rules that keep a competitive payment option from emerging, rather than asking congress to control prices.

Consumers and credit card fees; Love em’ or hate em’, which is it? It depends on who you ask!

The battle for the hearts and souls of the American consumers, or more accurately their wallets heated up again this week with the release of conflicting reports. In one corner Visa released a survey that found shoppers are generally happy with they way things are today.  Most respondents felt that even if card acceptance fees where lowered the merchant would not pass those saving on. In the other corner we have the retail industry being lead by the Merchant Payments Coalition and supported by a July 2008 study that found 3 out of 4 Americans support legislation to reform interchange fees.

What’s the Congress to do? Given the mood in Washington, legislation controlling everything from profits, pay and bonuses seem to be up for congressional review. Why not interchange fees? 

One point to remember, as R. A. Butler said; “In politics you must always keep running with the pack. The moment that you falter and they sense that you are injured, the rest will turn on you like wolves”. In other words, if the industry asks for interchange fees to be controlled; how far behind are limits on gas sales profits?

Disintermediation: Can retailers compete with the financial institution?

Retailers righty complain about the high cost of credit and debit card acceptance. The issues revolve around the cost of card acceptance. The emergence of alternative payments or competition raises questions as to how Retailers can compete for consumer payment. Competition is sometimes referred to as the “third leg” in the strategy to fight high interchange fees, the first two being legislation and litigation (read politicians and lawyers). If retailers are going to use this “third leg successfully, what are the challenges and is the community up for the fight?

 

There are a variety of new programs available to retailers, all offer different technologies and target different types of bank customers. However, they all have one thing in common, the ability for disintermediation, or in other words, the ability for third parties (retailers) to provide these services instead of the customer’s financial institution. A good example of disintermediation is decoupled debit cards. There is no doubt that these services will continue to develop.

 

With decoupled debit the disintermediation occurs when the retailer eliminates both the issuing bank and card association from the consumers card based transaction. In doing so the retailer also eliminates the support (issuing and marketing) provided by these organizations. Eliminating this support creates a new set of responsibilities for the retailer. The importance of program design introduction and continuous messaging is paramount to successful program implementation and consumer acceptance. The only question is: Will retailers provide these services to the customer?

 

The alternative to competing is the proposition that the services provided by the card associations and banks are in fact high value services that retailers are unable to provide. If this is true then retailers may have to accept that the current payment card systems is a bargain; a proposition few retailers seem ready to accept.

Credit or Debit, the real source of desperation

The struggle between the Electronic Payments Coalition and the retail industry heated up this week with the publication an advocacy advertisement in the Politico. NACS responded quickly pointing to this advertisement as a sign that their legislative action in congress to control interchange fees is succeeding and this advertisement is indicator “of EPC desperation” While the EPC may be desperate, there are 2009 market trends that indicate that changing consumer behavior is the more likely source of desperation.

EPC members (credit unions, banks and payment card networks) have suffered through a chaotic 2009 where they saw declining volumes and increasing losses along with the unknown risks associated with potential regulation. More ominously, 2009 market trends show changing consumer behavior away from the credit to debit which includes a variety of alternative payment systems. Consumers appear to be making these changes because of reductions in available credit, and/or shifting consumer attitudes pertaining to debt and household financial management.

These trends are reinforced by metrics that show decreased participation in credit card reward programs matched by a corresponding increase in the use of debit card reward programs. Further consumers have become wary of new FI loyalty programs with the majority rejecting higher interest card products that offer loyalty rewards.

While the retail industry is focused on lowering credit card interchange, the consumer is moving towards debit. The transaction/payment industry understands this trend and so while the retail industry is focused on lowering credit card fees, the cost and usage of debit is rising. The old adage about winning the battle and losing the war may prove to be true as consumers abandon credit and move to debit.