Sunday, January 31, 2010

Interchange Fees: the Silent Visa Tax

As we've seen the federal government tackle credit, debit and gift cards, new attention is gearing up toward card network interchange fees. Interchange fees are the cost of using debit and credit cards charged to merchants for use of the network (Visa, Mastercard, etc.). The fees are about $.75 for every $100 spent and more than if the consumer uses the a debit card and enters their pin number. The GAO's November 2009 report on Rising Interchange Fees found the fees are posing a problem for merchants as they comprise a larger amount of the revenue earned with some merchants complaining that the benefit of cards such as lower labor costs and increased sales are outstripped by the cost of the interchange fees. The fees are enough that some discount retailers, like Costco, don't accept credit cards, but will allow the debit card usage. Of course, retailers cannot possibly refuse to accept VISA cards, for instance, so the fees are here to stay. While the fees may be here to stay, I suspect that the size of the fees will cause them to come under regulatory supervision at some point in the not so distant future. That seems to be the common result when greed and overreaching get to a point that complaint is loud enough. With small business owners trying to keep their businesses afloat during a recession, it is easy to see why there is more compaint about the size of interchange fees.

The New York Times just did a nice video (and article) giving a pretty good overview of the tension between the networks, merchants and ultimately consumer interests.

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Thursday, January 28, 2010

The Politics of Bernanke's Reappointment

The Senate today confirmed Chairmen Bernanke's reappointment to a second term at the Federal Reserve by a vote of 70 to 30 (See Bernanke Confirmed). As concerns abounded about the extent of the Federal Reserve's independence, Senator Schummer commented: “If you don’t like monetary policy when the Fed does it just wait until the politicians get their hands on it.” Well said. Bloomberg did a nice (and short) piece about the politics of the reappointment and the need for the Federal Reserve Chariman to go visiting with the politicians to keep his job.


Monday, January 25, 2010

Are Mobile Payments the Next Big Thing?

Forget all this business about credit cards (What You Need to Know About the CARD Act), debit cards (What the Fed's New Overdraft Rules Don't Do) and gift cards (Fed Targets Gift Cards). Here comes mobile payments! Mobile what? At least that is what I said to myself when Jim Chen sent me a link to a CBS article The Mobile Triple Threat (Jan. 22, 2010). Perhaps I've just been in denial that this was coming down the pipeline for real (or too busy complaining about the drawbacks of debit cards). Without knowning more, I found myself reacting "don't even think about doing this . . ." Well, perhaps that is a tad harsh. Merchants are serious about opening this door as handheld phones and readers have increasing amounts of applications for them. And, tighter credit and debit card rules couldn't hurt their motivation either, right?

The whole idea here is that the consumer could be in a store looking at merchandise and not only do research on the product using their mobile device, but also check inventory and make payment for the product (by a charge to their cell phone bill). Other possibilities include small credit card terminals that small merchants could plug into their own mobile device in order to run a customer's credit card (See, Twitter Co-Founder Tackles Mobile Payments). Pretty cool and technically beyond my expertise (See, Discover: Contactless Payment Sticker Users Inadvertently Crippling Performance). But . . . payments wise, this presents the same (and more) problems than consumers just paying at the register with their credit or debit cards. Surely, there are issues about how well the application transfers money and what to do about errors. One would hate to be walking through Best Buy with your phone in your pocket and accidentally purchase several televisions. Moreover, the risk of credit card data being misused or misappropriated is already a problem without the involvement of mobile devices. Poor reliability and speed follow along as potential pitfalls.

Apparently, Paypal, Google and Amazon already have mobile payments capability, so mobile payments appear to be upon us. Mobile payments companies are beginning to receive funding for their ventures, so this will be an area to watch develop (Mobile Payments Startup Boku Lands $25 million). Always a big question regarding payment methods is the cost associated with its use and disclosure to consumers. For me, it will be a while before I pay using my phone.


Sunday, January 24, 2010

The Big One!

Bless them boys, Who Dat! and Geaux Saints! As someone that spent most of my life in Louisiana, the Saint's getting to the Superbowl feels like an impossible dream that just came true. As someone who lived in New Orleans most of my adult life, who watched from afar after moving away from Louisiana the city that was the state's most visible symbol destroyed by the "big one," that no one thought would come seeing the Saints eligible to play in the "Big Game," that again, no one thought would come, seems surreal. In New Orleans before Katrina, the newscasts would advertise for hurricane preparedness, asking proverbally "what if the big one hit New Orleans." Well it did, and the city has never been the same. For many, the New Orleans Saints represented a break from the reality of mold covered homes and lost possessions -- a way to forget that the city they loved was now forever marked by the eye of a perfect storm, that destroyed lives, houses, and hopes. No symbol was more emblematic than the Superdome -- a building whose exterior mirrored the cities pain for so long.

Tonight's game was bigger than football. It seemed to confirm that the past is over. And maybe that's ok. In New Orleans, the past, before Katrina seemed ideal. It was the after-Katrina world that was so scary. But tonight's win in the same dome where people's lives in the city were forever changed, maybe offers a glimmer of hope. Perhaps the future can be better than the past was. The past was filled with inequality and political cronyism. Maybe that has not changed, but with every new day lies new hope. The Saint's showed that the future does not have to be worst than the past.

In reality, the last few minutes of the game seemed to encapsulate the Saint's and New Orleans' history. The Saint's offense seemed more like the aints' after the first half; the defense gave up first downs and big plays; and the season seemed like so many others of late -- lots of promise, but just short of the big one. And then, as if by divine intervention, the Big Ones came -- the biggest interception; the biggest forty-yard kick-off return; the biggest fourth and inches conversion, and the biggest forty-yard field goal; and, perhaps, the biggest win that the team and the city of New Orleans needed. The future is bright. The only thing I think I can say to match my thoughts -- Bless them Boys! And Geaux Saints.

And now, pulling a trick from Dean Chen's book, I can think of no better song to offer you than U2 and Greenday's The Saints are Coming

Marc (MLR)

Friday, January 15, 2010

Bankers Without a Clue?

Paul Krugman wrote a nice op ed piece in today's New York Times titled Bankers Without a Clue. Krugman observes disappointingly that the bankers just don't get it. In truth, comments like the financial crisis was just a perfect storm (Goldman Sachs’s Lloyd Blankfein) and that no one could have predicted its coming (Jamie Dimon of JPMorgan Chase & Co.) are pretty unbelievable. I hope that the executives of these large financial insitutions aren't and weren't really that clueless. That said, I agree with Krugman that I don't expect the banks to give much concrete advice on financial reform. The distrust the banks have of regulators (and desire to protect their own pocketbooks) has resulted in many of the banks repaying the TARP funds as soon as possible.

Bill Thomas who is Vice Chairman of the Financial Crisis Inquiry Commission has assured us that at least the questions will be asked. Question is, whether any meaningful financial overhaul will come from this?


Wednesday, January 13, 2010

What You Need to Know About the Card Act

For consumers looking for basic information about the CARD Act, the Federal Reserve just published What You Need to Know: New Credit Card Rules. What credit card companies must tell you:
  • when they plan to increase your rate and fees
  • how long it will take you to pay off your balance.
The circular also covers all the new rules on fees, rates and limits:
  • no rate increases for new cards in the first year
  • rate increases only apply to new charges
  • restrictions on over-the-limit transactions
  • caps on high fee cards
  • protections for underage consumers (under 21)
Finally, the circular contains some new rules on billing and payments:
  • standardized payment dates and times (i.e. payments due on the same day each month)
  • payments applied to highest risk first
  • no two-cycle billing.
All and all, the circular is easy to read and even contains handy definitions and links to other information. Hopefully, consumers will be able to find this easily on the Internet (and will read it). Three cheers to the Fed for trying to get the word out.

Tuesday, January 5, 2010

Spot Light Shines on Debit Card Interchange (Finally)

For several years now the hot payment card story has been the rising interchange fees effectively paid by merchants to card-issuing banks on credit card transactions. A major class action attacking those fees is well underway, and the Department of Justice, Antitrust Division, has an open investigation.
Commentators have disagreed about whether market competition between Visa, MasterCard, American Express and Discover could yield an appropriate interchange fee or whether more aggressive industry regulation is required. Some say that the only competition is to increase fees to encourage banks to issue a particular network's cards. But some historical evidence suggests that competition among networks does create pressure to lower interchange fees to increase merchant acceptance. There has also been considerable debate about whether interchange fees constitute an unfair tax on those who do not use credit cards.

Surprisingly, however, debit card interchange fees have coasted under the radar since the 2003 settlement in which Visa and MasterCard agreed to pay merchants $3 billion and permit the acceptance of credit cards but not off-line signiture debit cards. At that time, Visa also significantly lowered the interchange fee on its signiture debit cards.
Today's New York Times has a front page story Visa's Strategy in Debit Cards: Push Up Costs by Andrew Martin taking Visa to task for its more recent debit card pricing practices. This attention is long overdue. In contrast to credit cards, the case against Visa and MasterCard's interchange fee pricing practices and the need for regulation are much stronger in the debit arena. Under the right conditions, American Express and Discover could possibly serve as a competitive check on credit card fees, but neither has a significant enough presence in the debit market to challenge the banks issuing Visa and MasterCard. And while the spending flexibility created by credit cards creates significant benefits for consumers and potentially increased sales for merchants -- benefits that may outweigh the cost of credit cards -- debit card benefits are considerably more limited for both consumers and merchants, and their costs are thus significantly less likely to be justified.

The development of debit cards is quite interesting. They began as extensions of ATM cards issued by regional networks of banks with the goal of saving costs by encouraging consumers to switch away from paper checks. Interchange fees were virtually non-existant and, in some cases, banks even paid merchants and consumers to stimulate use of the cards. But banks faced two problems. Like ATM cards, these early debit cards required the entry of a PIN, and most merchants did not have card acceptance systems that could handle PIN entry. Second, because the cards did not generate significant revenue for the banks, they could not justify investing in the advertising necessary to educate consumers about the cards.

Visa responded in the mid-1980s by creating a signiture-based debit card that could run over the Visa credit card network. It permitted any merchant accepting credit cards to also accept debit. And because the card was priced at near credit card levels, the banks were willing to support heavy advertising to stimulate debit card use. The scheme worked. Debit card use exploded.

An initial period of competition arose between Visa and the regional networks (as well as MasterCard) which argued that on-line PIN-based debit was a safer, lower cost option compared to Visa's signiture debit. During this era, Citibank's representative on the Visa board reportedly called the regional network operators "through-put jockeys" because they cared only about increasing volume on the network without paying sufficient attention to bank profits. The campaign thus began to encourage consumers to use signiture debit -- despite the greater potential for fraud and higher processing costs -- through rewards programs and other methods.

These practices led to a mid-1990s major class action led by Walmart and Sears, arguing that Visa and MasterCard illegal tied acceptance of signiture debit cards to credit cards. Six years later, Visa and MasterCard agree to settle the case by permitting merchants accepting credit cards to reject signiture debit and to reduce signiture debit interchange fees.

Although PIN acceptance is now widespread, expensive signiture debit remains a significant market force shifting billions of dollars annually from the retail industry to the banking industry. Why? After the settlement, very few merchants refused to accept signiture debit, fearing that they could lose customers. Today, Costco limits acceptance to PIN debit, and a few other major retailers try to steer customers to PIN, but most do not. In addition, even before the settlement, Visa began a strategy of increasing the interchange fees on its own PIN debit cards, including a major jump in 2007 that left its PIN system's interchange only slightly below its signiture debit interchange. The strategy has had the dual benefit of (1) forcing MasterCard and the regional networks to increase their PIN debit interchange to avoid losing bank support to Visa, and (2) discouraging merchants from disfavoring signiture debit by reducing the pricing spread. A former regional debit network CEO, Ronald Congemi, bemoaned Visa's strategy in the Times article: “What we witnessed was truly a perverse form of competition. They competed on the basis of raising prices. What other industry do you know that gets away with that?”

Critically, debit card issuance is much less costly for card issuers than credit card issuance. Debit cards are issued virtually costlessly to checking account holders as part of the ATM card package. Moreover, they carry virtually no credit risk for the issuer, as the money for the charge is removed from the checking account promptly for signiture debit and immediately for on-line PIN debit. On-line PIN debit also dramatically reduces fraud risk.

Perhaps because credit interchange fees have increased so much, debit cards may appear to be a good deal for merchants. But given the cost differences for card issuers, debit card fees may be much less justifiable and thus a more appropriate target for regulatory attention.