The convergence of payment and loyalty programming and the trends influencing consumer payment behavior.

Confluence is the act of flowing together; the junction of two or more bodies of water; the place of meeting. Like two rivers, convenience store operators navigate both payment and loyalty relationships. The confluence of these two programs is the card and the consumer. Data suggests that retailers can recapitalize “Swipe Fees” as “Rewards” by leveraging consumer’s willingness to participate in loyalty programs and their increased preference to use debit payment.

According to “The Big Sort, 2009 COLLOQUY Loyalty Marketing Census, in 2008, 51 million consumers participated in Fuel/Convenience loyalty programs.  2009 saw the further expansion of loyalty with a number of retailers launching new programs. That same year, 422 million consumers participated in Financial Services loyalty programs (credit/debit rewards). While the convenience store industry was hammered by low margins under onerous interchange fees, financial institutions used up to 45% of the “Swipe fees” to drive their business forward, achieving nearly ten times the number of participants. 

The January 2010 version of “The 2008 Survey of Consumer Payment Choice” published by the Federal Reserve Bank of Boston reveals data demonstrating consumer’s increased participation in debit rewards programs.

\The two studies point to specific trends that support the confluence of loyalty and payments. Consumers now belong to an average of 14.1 loyalty programs, but only 3.5 credit cards. The average consumer has adopted 5 “Payment Instruments”. More consumers have and use debit cards than credit cards (88.2% vs. 78.3% w/ 208% increased usage). Consumers have more “loyalty” to their debit card than credit card with 27.5% of consumers discarding a credit card, while only 5.9% reported discarding a debit card. The analysis indicates that consumers are more willing to join a loyalty program than a payment program. Further when customers use a card for debit, they are less likely to discard the program making for a double win; more enrollment with less attrition.     

The conclusion is that growth in Fuel/Convenience loyalty programs and increased debit card usage considered in juxtaposition with the high rate of attrition of credit card users suggests that retailers offering debit rewards as a feature in the loyalty program could recapitalize a significant percentage of “Swipe Fees” as consumer rewards resulting in greater consumer loyalty and increased ROI.

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Is “Social Justice”, the new rallying cry in the battle over interchange fees? What’s next price controls?

 “Pandora opened her jar and unleashed many terrible things on mankind.”

 In February 2010 the Consumers for Competitive Choice (C4CC) released a report called “The Costs of “Charging It” in America” by Shapiro & Vellucci: The report offers a number of conclusions, including the proposition that government regulation of interchange fees is Social Justice. Social Justice is a concept used to describe the movement towards a government regulated socially just world. The report suggests that the economics behind payment platforms, Two-Sided Markets and their inherent “Network Effects” create negative “Regressive Cross-Subsidies”. The suggestion is that interchange fees create a system where the poor pay for the privileges of the rich.

 In a paper written by Bolt & Chakravorti titled “A Review of Payment Card Economics” published in the November 2009 Lydian Payments Journal concluded “There is no consensus among policy makers or economists on what constitutes an efficient fee structure for card payments”. They go on to say “efficiency of payment systems is measured not only by the costs of the resources used, but by the social benefits generated by them”. Shapiro & Vellucci would seem to agree when they add “The current credit card and debit card systems provide valuable services to consumers and merchants and those services involve legitimate costs and therefore prices. Apparently the concept of profit for risk is not in their equation.

Last week a Delaware politician suggested mandating Full-Service Gas as a job creation initiative. Today the NRF urged Senator Dodd to add Interchange reform to the financial services reform bill. The C4CC published report suggests that Interchange Fee Regulation is a morally just cause towards achieving a level of Social Justice. Are retailers ready to see Social Justice added into their margin equation?

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Orwellian market principals; is legislation regulating interchange fees a harbinger of greater merchant acceptance of government control over industry?

Close on the heels of Barney Frank’s decision not to pursue HR 2382, and as the industry plots its next step, merchants might want to consider the words of Canada’s Finance Minister Jim Flaherty. The Finance Minister is quoted as saying; “(he) would exercise the new powers (sic. impose card use fees) if the industry failed to comply with a proposed VOLUNTARY code of conduct. Merchants’ should ask themselves if this is the type of government intervention that is appropriate in the United States? Merchants might ask if they are opening the chicken coop to the wolf. If the government can regulate interchange fees, what else could they control? More importantly; who will determine what a “fair price” is and will merchants be pleased with a “regulated result”?  What if the Government chooses to raise fees rather than lower fees?

One way to evaluate this question is to consider how merchants feel about interchange fees in countries with government regulation? I read a blog about one consumer’s experience with credit card fees in New Zealand and Australia. He reports that most merchants specifically asked if he wanted to pay using signature or PIN? One restaurant is reported to have a sign stating “$15 min.” explaining that credit card fees were too high to allow purchases under $15 using a credit card. Imagine that? Even with card fees at 0.55%, merchants reported interchange fees are too high.

The current political environment is ripe for all sorts of government intervention. Government sponsored higher interchange fees are possible, particularly if interchange is seen a source of tax revenue. The merchant community could find that advocating interchange regulation might lend support to adverse government action in areas like Motor Fuels, Tobacco, Labor and Healthcare and other issues where they seek less, not more, government involvement.

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“War on Cash” or “War of Words over Card Fees”; the battle between two industries with very different points of view.

The epic battle between the Merchant Payments Coalition and the Electronic Payments Coalition heated up again this week when NACS spokesman Jeff Lenard was quoted in the America Public Media online journal “Marketplace” saying “Welcome to the war on cash,” in response to increasing debit card transaction fees. Adding; “that the credit card companies have to find new revenue sources” as a result of The Credit Card Reform Act, and that “one of those is going to be interchange”.

 Meanwhile the “War of Words over Card Fees” continued as the Electronic Payments Coalition (EPC) reported that Senator Arlen Specter (D-PA) has indicated to Pennsylvania banks that he will introduce legislation which will mirror H.R. 3282. The EPC says that the “legislation will potentially shift the cost of accepting credit and debit cards onto consumers”. Frank Pinto, CEO/President of the Pennsylvania Association of Community Bankers goes on to say “When retailers accept cards in their stores, they receive profits, customers, guaranteed payment, and the golden key to e-commerce–and they shouldn’t have their customers pay for this cost of doing business.”

 Rising Signature Debit Transaction Fees are the latest cause for merchant concern. Consumer behavior is changing as debit becomes the preferred “method of payment”. Card Issuers are competing with each other for the consumers business. One result is that the Issuers and Card Associations are promoting the use of Signature Debit over PIN Debit because the signature debit interchange fee is higher than that of PIN debit which funds the reward program. The justification for the different fees is that the financial risks associated with the two types of transactions are different; Signature being more risky than PIN and therefore meriting higher fees. The paradox is that the industry is promoting the use of the riskier transaction assumedly because it is more profitable. The reality is that debit fees are approaching credit card fees, and that the two tiered debit fee is probably going to be phased out in favor of the one higher interchange fee.

 Sun Tzu the historical military strategist is well known to have said “Know your enemy”. Another of his lesser known quotes is “opportunities multiply as they are seized”.

 The merchant community could heed his advice when thinking about payment. The payment industry has noticed the consumer’s preference for debit. As a result the card issuers are offering richer debit rewards programs as they compete for the consumers business. Merchants can expect to see the cost for these consumer transactions to rise as these programs grow in popularity. Merchants must ask themselves, has the time for war arrived and is the “opportunity” competition?

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“It is not on our agenda this year,” is competition the only option in the battle over interchange?

Alexander Woollcott said “Many of us spend half our time wishing for things we could have if we didn’t spend half our time wishing.” The same might be true when considering the high cost of card acceptance and the path to lower Interchange fees.

With eight words, “It is not on our agenda this year,” Barney Frank ended the speculation over H.R. 2382, the Credit Card Interchange Fees Act legislation aimed at regulating interchange fees. Representative Peter Welch (D-Vt.) explained saying “He (Frank) doesn’t want to necessarily spend time moving things here when there’s been so little response in the Senate,” Merchants are left exhaling with the slim hope that U.S. Senator Arlen Specter (D-Pa.) may introduce a bill that seeks to limit interchange fees. It now seems fair to say that the effort to use legislation to control interchange has failed, at least for 2010.

Merchants had pinned their hope for reform on The Merchants Payments Collation’s three pronged strategy, legislation, litigation and competition, to lower card acceptance fees. The question now: is competition the only option in the battle over interchange?

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