Why do some merchants make you sign twice?

This is something I am running into more and more frequently. The clerk asks you to sign both the credit card slip as well as the cash register receipt. Presumably, they need to keep the signed cash register receipt to deal with chargebacks. There could be an opportunity here for a payment provider to offer a better service to retailers so that they don't feel they need to do this.



Even worse, the other day a major (and reputable) retailer in Singapore actually typed in the CVV number on my card that proves that the merchant did actually see the card. The number was typed into the POS terminal provided by the merchant's bank, so the bank is involved in this.

Why aren't payment providers solving these problems for merchants in a cleaner, more convenient way?

Mercator encourages acquirers to develop value added services

PaymentsNews reported yesterday on a Mercator report titled, "Merchant Acquiring in the United States 2008: Birth of the perfect storm".

Pressure on merchant acquirers has always been strong, but things are expected to get worse. Mercator encourages acquirers to protect their businesses by focusing on value-added services leveraging payment data, among other things.

"Diversification of merchant services business models and emphasis on ancillary revenue streams generated by value-added services, fee revenue on non-bankcard payment processing, and new ways in which acquirers can leverage their data will all be necessary for continued market performance. Payments savvy merchants, who understand that the electronification of payments and the systems that support them are tools that can be used to optimize business, are after providers that can help them achieve that optimization."

Sounds a great deal like PIVAS (Payment Information Value Added Services) promoted by Gartner.

What do you think? This calls for a very different mindset from that of cutting costs. Are acquirers in your country able to think differently and develop new services to boost revenues?

Conference themes (a bit of unabashed self-promotion)

Are you looking for a conference speaker who delivers thoughtful and thought-provoking presentations on current topics facing payment executives around the world?

How and when should banks innovate? Should banks lead new initiatives, like mobile payments, or should they follow others and play a supporting role? How can banks prepare for the risk of lower interchange? Will contactless change the global payments landscape?

As many readers of this blog know, Aneace frequently addresses these topics and others from - let's say - an unconventional point of view.

Download Aneace’s conference and bio brochure here.

Are Asian banks having second thoughts about outsourcing acquiring to third party processors?

Last week, an executive with a regional bank in Asia explained to me that they were beginning to regret the decision to outsource their acquiring activities to a major third party processor. They are finding that without direct control of their acquiring business, it is now much harder to develop marketing promotions and partnerships with merchants.

These promotions have become very important for credit card issuers in Asia. They're all over the place. As just one example, I took a picture on Saturday of a Citibank promotion at a restaurant in Singapore. See other examples here of joint bank/merchant promotions that are possible when banks retain their acquiring activities.

In a separate discussion, this same complaint was echoed by another regional banker who had looked at outsourcing their acquiring activities as well, but had decided against it for the same reason. They had come to the conclusion that they would quickly lose the ability to develop promotions with merchants. Acquiring was considered too strategic to outsource.

In yet another discussion, an executive with a third party processor mentioned that there is a growing desire among Australian banks to look at issuing and acquiring holistically, in order to get more out of their payment activities. This after seeing the issuing side of the business hamstrung by interchange regulations.

Third party processors are not usually the right people to understand and offer marketing services to banks and merchants. They focus heavily on technical operations, getting lots of terminals out and churning through lots of transactions, the more the better. Now, to satisfy banks better, third party processors may need to look at things more from a marketing angle and move up the value chain a bit.

Examples of card promotions possible when banks retain their acquiring activities

You can see these promotions across Asia, where many banks are still active in merchant acquiring and see it as a useful support function for their card issuing business. Some banks are finding that without direct control of acquiring, it is much harder to develop marketing promotions and partnerships with merchants (more here on banks having second thoughts about outsourcing their acquiring activities).

I took this picture on Saturday at a restaurant in Singapore. This promotion is exclusively for Citibank cardholders. When I paid, I saw that there were several terminals behind the counter, one of them a Citibank terminal. So Citibank has an acquiring relationship with the restaurant, but so do UOB and DBS, suppliers of the other terminals behind the counter.



Then, at a Caltex petrol station, I got this offer when I used my HSBC card. The offer is stapled to the credit card slip (it could have been printed at the bottom of the credit card slip instead, and targeted based on my prior fill-ups at Caltex, but it wasn't). Again, just like the prior example, Caltex has an acquiring relationship with HSBC.



Here are a few other examples of bank/merchant joint promotions:
Old, boring cards have trouble competing side by side with new generation cards
A crowd of cards caught copycatting, doing their best to look exactly alike
Another ‘Exciting-new-card-versus-boring-old-card’ picture
Tod’s leather goods
Making credit and debit cards more valuable in the Philippines


Since I was in reporter mode, I couldn’t help stealing a picture at an iconic retailer in Singapore that every Singaporean knows, Mustafa Centre.


You can clearly see 5 terminals here representing 5 different acquirer relationships. If you look closely, you can see the main feature that requires all these terminals – credit installments, with each bank offering their cardholders a slightly different plan.

Why doesn’t a third party processor offer a universal installment plan application that can link up to any of these banks through a single terminal? That would bring costs down for the bank, reduce counter top space for the merchant, simplify procedures for the clerk, open the installment feature up to lots of other banks that don't do acquiring, and provide the third party processor with a cool feature to help win new business.

When should a bank launch a mobile payment service? Do banks even need to innovate?

Since contactless credit cards are not taking off as fast as expected, and neither customers nor merchants are excited about tapping a card instead of swiping it, some analysts have started looking at contactless as a bridge to mobile payments, which is now seen as the next great revolution. I'm having trouble buying this.

How can contactless create the reader infrastructure that is required for NFC payments if merchants are not interested in upgrading their terminals for contactless cards to start with? If the readers are built into new generation payment terminals and cost nothing extra for merchants, then yes, the readers will be deployed over the next ten years, during the normal replacement cycle for payment terminals. If all terminal vendors build the readers into all of their new generation terminals at no extra cost, then a large portion of merchants will automatically be contactless ready within the next five years or so. Don’t hold your breath.

According to some people, there is however a much more realistic bridge to mobile payments. Contactless transit cards.

In Hong Kong and London, contactless transit cards can be used outside the transit system to purchase things at traditional shops like 7-Eleven. According to Cassis International, a supplier of mobile payment systems to banks in Asia, this creates a far better environment for banks to launch mobile trials. In fact, in response to a question from a banker attending a recent conference in Hong Kong, Cassis CEO Thian Yee Chua said that if there is no contactless transit infrastructure in the bank’s market, where the cards are commonly used both for transit as well as to pay at high frequency merchant locations, then “don’t even try to get involved in mobile payments”.

Mobile payment feels like something that is definitely going to happen someday, but it is still very difficult to see how banks can benefit and how they might even play a part. Banks may be forced to play a secondary role, if any at all. Speaking at the same conference on innovation, Chris Skinner of Balatro pointed out how all of the successful examples of recent innovations in payments come from new players, not banks. Paypal of course, but also Hong Kong's Octopus, London's Oyster, China's Alipay and others. Chris described how Wells Fargo was originally the payment institution behind Paypal but apparently didn’t see the opportunity to buy Paypal before the company was too big.

Here is a hard one for me to get my head around: should banks innovate more and lead all of these new payment initiatives, or should they follow others and try to play a supporting role?

In chairing the conference, after almost all the presentations had been made, I asked the audience for a show of hands. How many people agree that banks need to be more innovative? I was surprised to see that almost everyone agreed. And there were many more bankers in the room than technology suppliers.

While bankers themselves feel, somewhat intuitively perhaps, that they need to be more innovative, their organizations are not usually structured to promote the type of innovation we are seeing today. For example, most banks have pretty much abandoned their acquiring activities, so they are seriously limited in their capacity to impact the moment of payment, something that is needed for things like contactless and mobile. This is especially true for the major global and regional organizations that dominate the credit and debit card market. In a sense, this creates a new opportunity for national players that still have a holistic view of payment, with integrated issuing and acquiring activities. But I am digressing into another blog post. So I’ll stop right now.

Internet banking

Chris Skinner was in Hong Kong at the Financial Cards & Payments Asia conference which I wrote about earlier. Chris just did a very good post on a presentation by eBank Japan. Check out Internet banking ... but not as we know it.

"An $8 billion in assets bank, with almost 3 million customer accounts, operated by just 195 staff. 195 people in total that is. 15,000 accounts per staff member. How do they do it?"

How will banks meet the challenges of innovations in retail payments?

I chaired a conference this week in Hong Kong (Financial Cards & Payments Asia) and gave the keynote address, which you can download here.

| View | Upload your own

Many thanks to Dave Birch for giving me the idea of opening the talk with a 1964 magazine advertisement for Sheaffer pens. The ad shows a futuristic key ring that projects a holographic image of a credit card. It even shows 4 tiny buttons which could be used to enter a PIN code on the ring. The really amazing thing though is that the ad demonstrates a blind spot that we humans have when it comes to innovation: Shaeffer being a pen company, they couldn’t imagine a future in which pens would not be used to sign credit card receipts.

Interchange is now as big as biotech

$64 billion. That’s how much interchange revenue banks earned globally in 2006. Comparable to the total combined revenues of all publicly traded biotech companies worldwide. When it comes to profitability, the comparison doesn't work so well. Biotech racked up a global net loss of $2.7 billion in 2007 while interchange income appears to be very profitable, although it’s hard to say. Better to issue premium cards than search for new biotech cures.

Here are a few other figures: interchange is roughly double the size of the microprocessor industry ($35 billion worldwide), more than double the size of the electronic game industry ($28 billion worldwide), Hollywood box office sales ($23 billion), the music industry ($30 to $35 billion) and even venture capital investments ($31 billion).

There are lots of experts, analysts, journalists, consultants, etc. focused on all aspects of these industries, on new products, growth strategies, mergers and acquisitions, threats and opportunities. Why is there no similar focus on the interchange industry? Why are there no payment experts debating the impact of new payment products on interchange pricing and on merchants' desire to pay to accept plastic? Or how about growth strategies in the interchange industry? Who is actively and openly working on growing interchange in a sustainable fashion? I would love to see a major international banking conference dedicated to that subject. US biotech companies alone spent $16 billion on R&D in 2006. Did anyone see even a few billion spent on protecting and growing the interchange industry last year?

Can an industry the size of biotech just dry up and go away?

More on Free Payment Processing

A couple months ago, I wrote a piece called "Free payment processing" which looks at using marketing revenues to subsidize commoditized payment services. Eric Remer (I believe his company's blog is PaySimple blog) just provided an interesting comment to that post.

Aneace,

How are you? I actually live in Boulder, CO and run an electronic payment processing company in Denver.

Love your train of thought as I do believe we are getting closer to a free world. Payment processing is incredibly cumbersome and confusing for merchants (specifically small businesses). However even in a free world, there needs to be one part of the equation that merchants/consumers are willing to pay if they are receiving value. It has been proven time and time again accepting electronic forms of payments increases sales and reduces collection risk. Merchants have accepted that relationship, however, what they don't enjoy is the hidden fees, statement fees, up charges, inept service and provisioning process. I believe the exisitng distribution model is broken.

The problem with marketing supported anything is there is a finite number of marketers willing to spend $$. It is my belief that many of the free social networking sites will begin to feel this pinch relatively soon. FaceBook is the largest social networking site in the world and had $100M of rev. last year. Where will all the ad dollars come from to support the nings, my space, facebook, and the hundreds of others popping up.

So with that hurdle being a relative large one, how would acquirors really replace their Billion's of collective dollars in revenue through ads?

Very interesting concept, but how to execute on the vision is the real question.

Eric Remer

I agree that acquirers would not be able to collectively replace their billions of dollars in revenues through ads. But a single acquirer could use the strategy and create a very new and different offering.

All current billable services would likely not be offered for free. Lots of the things that acquirers sell today look like premium type services, or could be positioned as such, and could still be charged. The things that appear the most as commodities could be offered free.

How big are the advertising budgets that could be funneled through payment related marketing services? According to a promo industry trends report, in-store advertising alone is a $42 billion industry in the US, around the same amount as total interchange fees paid by merchants last year to accept Visa, MasterCard, American Express and Discover cards. Spending on loyalty programs is estimated at $2 billion, the same as sampling (another $2 billion) and just a little more than games ($1.8 billion). Direct marketing still tops the charts at $53 billion.

Catalina Marketing is an interesting company to look at in this space, although they are not involved in payment processing. Catalina provides targeted marketing services based on coupons and marketing messages printed on cash register receipts in supermarkets. They charge on average 7.5 cents per message, depending on the type of targeting criteria used. 2005 revenues were $410 million (their most recent annual report is here).

What Catalina does in the supermarket space is what I keep talking about (roughly speaking) in the much larger retail space including convenience stores, quick service restaurants, fashion, and virtually all other physical retail outlets.

Catalina Marketing was purchased for $1.7 billion in April 2007 by private equity firm Hellman & Friedman. That’s a multiple of sales that many payment companies would love to see.

5 ways to prepare today for the risk of lower interchange revenue tomorrow

When Australian banks got hit with mandated interchange fee cuts, virtually all of them reacted the same way. They devalued their rewards currencies and increased the annual fees charged to cardholders. Some began issuing American Express cards in addition to Visa and MasterCard, for higher rewards rates.

Whether or not interchange gets regulated in the US or Europe remains to be seen. But there are things that banks can do today that can help adjust to the current pressure on interchange and prepare for potential risks.

“Just because there might be a tornado doesn’t mean we should live in the basement, and just because there is a risk that interchange fees will go away doesn’t mean that we should act like they are already gone,” says David Evans over on the Catalyst Code blog. “What we can say, however, is that there is a significant risk that interchange fees will fall and banks need to be prepared for that scenario.”

If you are a banker hearing increasingly loud calls for interchange regulation, how do you prepare? Here are a few things that can help improve your profitability today, and will help you adjust better than your competitors if interchange gets cut tomorrow.

1 – Cut the cost of rewards by getting merchants to pay for bonus points that they provide to your cardholders. Merchants can agree to co-finance your rewards program in exchange for the free advertising and marketing that they get when you promote the relationships to your cardholders (more here). Merchants also value the ability to include targeted marketing messages in the statements you provide, or on the bottom of card receipts (more here).

2 – Cut the cost of running your rewards program by simplifying the rewards redemption and fulfillment process. Give customers the ability to redeem points directly at certain merchant locations, whenever they want. This helps to cut costs related to sourcing of rewards, inventory management, delivery of rewards to customers, etc. Merchants like it because your cardholders will use their rewards to buy things that they might not have bought otherwise.

3 – Switch rewards hungry premium card customers to American Express for higher interchange revenue that might not be impacted by the same regulations as Visa and MasterCard premium products. This happened in Australia. However, the tactic might not work as well anymore, as merchants now appear to be focusing on surcharges and other steering mechanisms that could apply to any card product.

4 - Choose Visa, MasterCard and American Express premium products that have a decent and plausible interchange story attached to them. Stay away from premium card products which generate higher interchange fees but which don’t offer real, tangible benefits to merchants above and beyond those offered by standard credit cards or even debit cards. It’s those additional benefits to merchants that make a scheme product valuable to you, since merchants will have less of an incentive to attack interchange fees on those cards, or steer customers away from using them.

5 – Add new merchant acquiring fees (if you are also an acquirer) to charge for items which you may have been giving away free. Even better, develop new revenue streams on the acquiring side. If interchange gets cut, there is an opportunity for acquirers to offer new value added services that are paid with a portion of the money freed up by the lower interchange fees. See more posts on acquiring here.

Paris conference last week

Here is my presentation from last week's conference in Paris, "Le Renouveau du Marché des Cartes en France", organized by Ange Galula.

| View | Upload your own

Pay your taxi fare by SMS

I like solutions that mix old and new technology together, like paper receipt messages and e-payments. The right mix is much more effective than a pure electronic solution, which tends to be cumbersome and limited in capability. So I was interested to hear about this SMS payment solution being rolled out by an Abu Dhabi taxi company:

"After a taxi ride, you can follow the instructions on the card to pay the fare by SMS. You can type the taxi number and fare, and send an SMS to a given number. A confirmation message will be sent to the customer's mobile phone and to the electronic device in the taxi which will print the receipt."

Neat, simple, convenient, and works with any phone, now.

Mobile junk mail from McDonald's

Dave Birch has done an insightful post on contactless, mobile payments and value added services.

He points out that contactless has marginal utility in the US, where all transactions are on-line anyway, which is something I have argued repeatedly as well. Dave and many other people that I have spoken to, feel that contactless is just a transition technology paving the way for mobile payments. If contactless results in lots of terminals being equipped with NFC readers, then indeed this could open the way for mobile payments. But if contactless never takes off in a significant way, then it might not be a mobile NFC facilitator after all.

The best part of the post describes how McDonald's is testing a mobile application that lets customers order their meal on their phone, tap it against a reader to place the order, then receive an e-receipt. McDonald's plans to use the application to send coupons to customers, targeted marketing obviously being the main reason they would be doing this. But apparently customers are resisting this, and avoiding technologies that lead to unwanted mobile marketing messages.

The conventional solution is simple: request the customer's permission. But I don't like conventional wisdom or conventional solutions. They're too boring and easy and rarely result in fantastic new products and services. In this case, permission based marketing would result in a massive number of customers opting out, making the solution much less useful to McDonald's. It would be simpler to trigger a paper coupon on the receipt printer, targeted based on whatever criteria McDonald's wants. A receipt in many cases is still going to be printed. In many countries it is even obligatory, even if it is in addition to an e-receipt. Since the customer usually expects a piece of paper anyway, this is non-obtrusive. If you don't want the coupon, just toss away the receipt, like you do today.

UPDATE: Click here for more information on the McDonald's mobile marketing solution.

Are some banks already preparing for lower interchange fees?

To get ready for a potentially far less profitable card issuing business, some banks could be preparing to focus more heavily on a business that they have traditionally neglected: acquiring. This is what I have heard recently from several consultants and analysts in Europe, and my upcoming conference presentations will focus on this angle.

With credit margins already under pressure due to fewer revolving customers, and with the threat of reduced interchange becoming more real, issuing profitability might be on the way down. Acquiring has been neglected, even abandoned by many banks, so there might be an opportunity for new strategies. Some banks could offset decreasing profitability and revenues on the issuing side by developing new revenue streams on the acquiring side.

This strategy is especially relevant if interchange gets cut. Merchants will be paying less, so there is an opportunity for the merchant’s acquirer to offer new value added services that are paid with a portion of the money freed up by lower merchant discount fees.

What other ways can a bank deal with interchange risks? An individual bank doesn’t have much of a role to play in protecting interchange, that’s the role of the payment schemes. But a bank can choose Visa, MasterCard and American Express products which have a decent and plausible interchange story attached to them, and stay away from card products which generate higher interchange fees but which don’t offer additional benefits to merchants. It’s those benefits to merchants that make the product valuable to banks.

I am working on a more detailed “how-to” list of things banks can do today to prepare for the risk of lower interchange tomorrow.

China

This post has nothing to do with payments.

I know that some people look at my blog to know where I am. I'm in Haikou this weekend, the capital city of China's only major island, Hainan. Everyone has seen the CNN reports of the earthquake victims here, but in China it's on TV everywhere nonstop. Some people are even feeling a bit superstitious that so many things are happening in China the year of the olympics. You get a real sense of a country developing a shared national identity within a larger world. At least, that's the feeling I've been getting from the under forty generations, the ones that came after what they call the lost generations that had to suffer through the cultural revolution.

What's wrong with this picture?

Here's a hint: the maximum amount for a contactless transaction is $25, anything above that requires a normal card transaction.

Correction:

What I originally wrote in this post is not always true, and it turns out not in Singapore in any case. A friend of mine says this about the picture:

"The picture is of the UOB reader in Singapore. Visa payWave cards are accepted on payWave interface for any amount. I have bought curry puff at S$1.50 and coffee at S$4.00 using payWave. Also, Visa payWave limit in Singapore is S$ 100 much above the S$ 25 (I assume you meant S$ and not US$) you mention in your blog. So I think the blog is misleading... "

The problem is that sign, which is confusing. Part of the growing pains of getting merchants to correctly promote contactless, I guess.

“What have you done for me lately?” (Part 2)

(Part 1 is here)

Last week the Boston Globe ran an op-ed piece titled “Leave the ‘plastic’ alone”, essentially saying that merchants should stop complaining about the cost of interchange because payment systems today are so much better than they were 40 years ago. This is a really poor way to protect interchange.

The old days were indeed a big hassle for merchants:

“First, the customer's account number had to be checked against the latest bulletin of stolen-card numbers mailed by the credit-card companies. For purchases above a certain amount, the company had to be called for authorization. If the charge was authorized, a confirmation number was provided, which had to be recorded; the card was then run through the manual imprinter (ka-CHUNK), and the charge slip filled out and presented for the customer's signature. Finally the slip's three copies had to be separated, with one carefully saved for eventual deposit in the bank.”

A Boston Globe reader added these comments to the article:

“Imagine 1960. A hypothetical meeting of owners and CEOs representing millions of businesses is held. A payment option is announced that is faster, improves productivity, and enables virtually all store shoppers to become buyers - and to buy more and more often - with no merchant credit risk. Gasps are heard when the audience is told that 1 billion consumers worldwide could also make a purchase by mail or telephone. The cost: just a 2 percent discount to the face value of any sale. No reasonable mind could doubt that all in attendance at that hypothetical gathering would have jumped at this prospect, and would have seen the cost for acceptance as a bargain.”

The payments industry is definitely much better today, but so are lots of other information based industries, and their costs have all gone down in relation to volume, speed, capacity, etc. Taking this line of reasoning, going back in time a whopping 40 years, can only backfire on the payments industry. The hassles described in the op-ed piece were solved a quarter century ago when electronic payment terminals became widely available. That was the big jump, the big improvement, the WOW! that got lots of merchants excited about accepting cards. Since then, merchants spend much more on payment and have clearly not seen any real improvements substantial enough to increase the value of card acceptance. Otherwise, the Boston Globe article would be focusing on those more recent improvements and the more recent problems that have been addressed.

The op-ed piece concludes with this:

“But Visa and MasterCard are hardly monopolies, and merchants are not without other options. No one is forced to accept Visa and MasterCard; retailers are free to take only American Express or Discover, which operate on a different model and don't charge interchange fees. Online vendors have even more choices, such as PayPal or Google Checkout. And, of course, there are the old standbys: cash and checks.”

Right. So it’s like, if you don’t like my fees, stop accepting my cards. All or nothing. Take it or leave it. (The comment on American Express and Discover is revealing too - both companies do indeed charge merchants a fee for each transaction, which, from any merchant's perspective, are completely identical to interchange fees).

This is not helpful. The payments industry needs more positive and constructive people who are customer (i.e. merchant) focused and who can promote new value creation instead of all this stuff.

We certainly don’t need regulators setting interchange rates like they did in Australia, but with these arguments we’re just showing them that the industry is happy enough offering essentially the same value as a quarter century ago, for much more money.

Will merchants pass interchange fee reductions on to consumers?

This thought just popped into my mind when I read an article yesterday on Payments News, titled Consumers' Card Rewards Could Be Cut By Interchange Legislation. Scott Loftesness writes, "While merchants are saying that any interchange fee reductions would be passed along to consumers through lower prices, many in the industry say that is unlikely to be the case - and point to the lack of price reductions following action taken by the Reserve Bank of Australia that cut interchange fees significantly in that country."

If merchants pass along reductions to consumers, then their margins would be the same - so why all the cost and effort of lobbying the government to cut interchange? It doesn't make sense. Of course they will keep the savings.

"What have you done for me lately?" (Part 1)

The weather was gorgeous in Aix en Provence this weekend. I browsed through the antiques market on Cours Mirabeau on Sunday, where I found a few old magazine advertisements for banking products (what a geek, right???)


There was a bit of synchronicity involved here. I had just read an op-ed piece by a banker reminding merchants of the old carbon imprint machine days, and how merchants should be happy about today's electronic systems and stop complaining about the cost of interchange. Some of the comments left by others also described the payments world of the 1960's. Then, browsing through the market, I run into these old ads! I had to buy them. I hope you enjoy the ads here. I'll address the folly of bankers living in the past in the next post.



This Crédit Lyonnais ad is from 1960. You could go to any of the 1600 Crédit Lyonnais branches across France and withdraw money simply by showing your checkbook and an ID. Very convenient for the time!









Carte Bleue is a payment card association that came even before the associations which eventually became known as Visa and MasterCard. This 1969 ad shows how the card makes things even more convenient, since you no longer have to present a checkbook and an ID to withdraw cash. Plus, you could use it to pay at 40,000 merchant locations across France. All just by signing. The ad is filled with lots of little things that give an idea of life in the 1960's, including one that surprised me. When you got your card, you were also given a directory of merchants that accept it.






By 1982, Carte Bleue had partnered with Visa and the card offered essentially all the features that we are familiar with today. This ad is now over a quarter century old.









As the song goes, "What have you done for me lately?"

That's part of what merchants are saying today when they complain about interchange fees.

Has interchange regulation in Australia redistributed wealth in favour of merchants?

Mandated reductions in interchange fees in Australia were supposed to cause retail prices to drop, directly benefiting consumers. The whole idea is that interchange is a “hidden fee” that retailers bundle into their prices, and that a reduction in fees charged to merchants would benefit customers. Sounds like basic, logical thinking that you would find in a high school economics and civics class, doesn’t it? As it turns out, the regulatory experiment resembles a high school lab experiment gone wrong.

Here’s another report, this one by CRA INTERNATIONAL (summary, detailed report) that shows how mandated reductions in interchange fees have had the opposite effect of those that regulators were expecting. Retail prices are not lower. Instead, merchants enjoy stronger margins thanks to the lower cost of accepting cards. To make matters worse, banks have pretty much recovered their lost revenue by charging higher cardholder fees and cutting investments in payment innovation. Customers are the losers in this messy experiment.

Robert Stillman, Vice President of CRA INTERNATIONAL, writes, “We believe that the RBA’s intervention has redistributed wealth. There is no evidence that the undeniable losses to consumers from higher cardholder fees and reduced card benefits have been offset by reductions in retail prices or improvements in the quality of retail service. The RBA’s intervention has redistributed wealth in favour of merchants.”

The worse thing about this is that European Commission watchdog Neelie Kroes sees the Australian experiment as a success and wants to reproduce it in Europe. This makes me feel more and more that regulators are simply reacting to pressure from retail lobbyists, cloaking their decisions in some vague benefit to customers (and in Europe, some vague need to create a European payment scheme to compete with US brands Visa and MasterCard). I can’t for the life of me see why any regulator would possibly be doing this if they were not primarily interested in helping retailers improve their margins. What a mess.

At the same time, I can understand how merchants feel powerless as they see interchange fees imposed upon them with no ability to negotiate. “You don’t like our fees? Then stop accepting our cards.” That’s not the right answer. The irony is that a viable solution already exists in a growing number of countries. Leaving fees unregulated, but giving merchants the ability to easily surcharge card brands which are too expensive in relation to their value, creates a powerful incentive for schemes to make their products and services more useful to merchants. In response to this pressure, and to avoid having their cardholders subjected to surcharges, some payment brands will manage to create enough value to convince merchants to accept the higher fees, while others will simply have to reduce their fees. In practice, customers should see little if any surcharging, and merchants will get more value for their money.

This solution is echoed in a Wall Street Journal article by economist Leo Van Hove, titled “Regulating in the Dark”. Mr. Van Hove first tears apart the arguments for interchange regulation put forth by the European Commission, then offers the following conclusion:

“So if regulating one payment instrument can have unintended repercussions on substitutes, and a prohibition of interchange fees would be a leap in the dark, what are enlightened policy makers to do? They could simply try to ensure that market forces work, and in particular that merchants cannot be locked in by card networks. To that end, retailers should be allowed to ‘surcharge’ and pass on interchange fees to consumers. Promoting competition among card networks as well as among various payment instruments should also be high on regulators’ lists. More generally, we need policy makers who have a comprehensive vision of the future of our payment system – and who have the political courage to make cash more expensive in order to lower its cost to society.”

Here is a link to my prior post on why an unregulated interchange model is crucial to fostering competition between payment schemes, where I describe several ways in which payment schemes can innovate and create valuable new features and services for merchants.

Interview: Card loyalty and rewards trends

Recently, two payments journalists in two separate interviews asked me similar questions on trends in card loyalty and rewards programs. Here is a paraphrase of some of the questions, along with my answers.

“Card rewards programs appear in Europe to be merchant based whereas in the US the bank funds the rewards directly. Why do programs work so differently between the US and Europe?”

In fact, most banks in Europe also offer bank-funded points and cash back rewards, just like US banks. The difference in some programs comes from a structural difference between how banks in other parts of the world are organized. Outside the US, you can frequently find large national banks that are big in card issuing and big in merchant acquiring at the same time. For example, in the UK, three banks dominate the acquiring market, RBS, Barclaycard and Lloyds. These three banks are also very large card issuers. Banks that are involved in both issuing and acquiring can leverage their organizational structure to develop deeper relationships with merchants and create more value for their card programs. US banks do not have huge market share in acquiring, and thus have more trouble developing such relationships with merchants.

“What is the goal of banks working with Welcome?”

Many banks use Welcome’s technology to enhance their loyalty and rewards programs, through a combination of bank-funded points or cash back as well as merchant promotions delivered only on the bank’s cards, i.e. “on us” transactions. In this context, the promotions are seen by merchants as an extension to the bank’s loyalty or rewards program.

Welcome is now beginning to provide the acquirer division within banks the ability to offer promotions on all cards, not as an extension to the bank’s loyalty program, but instead as a value added service that can be charged to merchants in the same category as other promotional marketing services that the merchant pays for.

A bank’s acquiring division could use our software purely for “on us” transactions, or could also explore a combined approach, for example by providing merchants the ability to offer promotions on all cards, at a fee per targeted message/promotion, yet privileging the bank’s cards by making the promotional fee on those cards free. The objective in this case is to satisfy the merchant’s need to target the largest number of customers, while also getting the merchant to encourage customers to use the bank’s card more. We can explore many different combinations of business models.

“Are points programs thriving, or are they on the contrary doomed to disappear?”

It often seems that every bank has a points programs, and that they are all absolutely identical. Add to that the growing pressure around the world on interchange, and it is easy to understand that points and cash back programs have clearly reached the point that they have to evolve into something new and different.

Banks have two ways of looking at the cost issue, essentially by asking themselves one of two very different questions. Some banks seem to be asking, “How do I reduce the cost of my loyalty program and get merchants and other partners to fund part of that cost?” Other banks are beginning to look deeper at the original objectives of loyalty programs, objectives that can sometimes be achieved through other means than traditional loyalty points or cash back.

For example, if the bank is trying to establish stickiness and encourage usage, perhaps this can be achieved by adding a contactless feature in partnership with the local transit system. Barclaycard is doing this in London with the London underground. Of course, the feature won’t help Barclays outside London, but for London cardholders, having a single card to get in and out of the underground could prove to be stickier and more “loyalty generating” than what we normally think of as loyalty when we focus too specifically on techniques like points and cash back.

Another example is through merchant promotions, where merchants can leverage all card transactions to offer instant promotions based on prior usage, right on the credit or debit card receipt, for a fee, whereas doing the same thing on the cards from a specific bank or even a specific payment scheme is free to the merchant. This would clearly give the merchant an incentive to put signs in the store encouraging customers to use that bank’s or scheme’s cards, and offer some promotions specifically to encourage usage of those cards. Tie in a lower interchange rate on those cards, and the merchant will get even more excited!

“Could coalition loyalty programs be the answer to get merchants to fund more costs?”

Coalition loyalty has been around for many years, yet I have only seen two countries, Canada and the UK, where these programs work on a decent scale. Both of these countries have similar retail market structures. In both the UK and Canada, customers can choose between two or three major food retailers, two or three major petrol retailers, two or three major multi-category department stores, and so on. A coalition program that combines one retailer in each category can be a viable proposition to customers, since most customers are likely to shop at each of those retailers anyway. But in most other countries, where the choice of retailers is larger, a coalition loyalty program will inevitably leave out several key retailers that a customer prefers to shop at. So you haven’t seen successful coalition loyalty programs take off on a big scale across the world, in spite of the fact that they have been around for many years.

Candidates for "Best innovation in a loyalty programme" use XLS

I just noticed that two of Welcome's customers have been shortlisted for this year's Cards International Global Awards. Of the four banks that are shortlisted in the category Best innovation in a loyalty programme, two use Welcome's XLS software.

Bank of the Philippine Islands - BPI Express Credit Real Thrills

Kasikornbank Smart Shopping Programme

Congratulations to both for being shortlisted!

Loyalty 2.0, promotional marketing and interchange

I have just read “Loyalty 2.0”, a white paper by Karen L. Webster, president of consulting firm Market Platform Dynamics. Loyalty programs are so mature today that it seems that every company has one. Yet the white paper points out that eight of the top ten brands in North America don’t offer a rewards program and probably never will.


The list includes two notable retailers, Wal-Mart and McDonald’s. Wal-Mart is notorious for sticking with every-day low pricing instead of a formal loyalty program offering points or cash back rewards. As for McDonald's, you do sometimes see individual franchisees with loyalty programs, but these are mainly outside the US, and they are an exception not the rule. But I'm not sure why she included Bank of America in the list, a company that I thought had a rewards program. And of course, the GE Money division of General Electric manages lots of private label cards on behalf of other companies, most of which have some kind of loyalty program attached to the cards.

But the theme is interesting anyway, and other publications do paint a similar story. For example, according to the Food Marketing Institute, 60% of US food retailers don’t offer loyalty programs. Again, Wal-Mart is the most prominent example.

On the other hand, all retailers offer promotions, including those not involved in loyalty programs. Just walk past a McDonald's restaurant near you and you'll see lots of promotions without even going inside. According to Promo Magazine’s annual trends report, in-store advertising is a $42 billion industry in the US, while spending on loyalty programs has been stable at $2 billion.

There’s also an interchange angle to all this. Karen Webster writes, “Unfortunately for the merchant, 44 percent of the issuer’s interchange fee revenue generated at the store is plowed back into rewards programs for the card. In essence merchants are financing reward programs for which they may see little, if any, direct benefit. Of course, the big question is what happens to loyalty programs when interchange fees are reduced. That might not happen next year or even the year after, but it is a likely scenario.”

Boots till receipt promotions

Lots of merchants already print promotions and marketing messages at the bottom of till receipts, but they are based only on the amount the customer spends in one transaction. The next step is to print these offers and messages at the bottom of credit and debit card receipts, using a richer set of trigger criteria, like the date of the customer's last visit, or the number of visits or amount spent over a given period.


I picked up a couple things at Boots in London and received this promotional offer at the bottom of my till receipt. All shoppers get the offer. I didn’t use my Boots loyalty card (I don’t have one) and the checkout clerk didn’t ask if I wanted to apply for one.

But I did pay with a credit card.

Imagine if the same type of offer appeared at the bottom of the customer’s credit or debit card receipt, triggered based on whatever criteria Boots chooses, using payment data managed by Boots’ acquirer. The customer has been to Boots before, but not recently? Include a special offer at the bottom of the receipt, for occasional customers that could be shopping elsewhere. The customer is a heavy duty frequent shopper? Print a message encouraging the customer to apply for a Boots co-branded payment card.

"What a bunch of bloggers"

Chris Skinner of Balatro gives more detail on the blogger panel at the Digital Money Forum in London. Apparently, while we were sitting on the panel, another member was using Twitter to chat with several audience members!

"One of our panel was using Twitter during this discussion. His twitter stated that the moderator talked too much and various folks in the audience agreed on Twitter. This was a silent conversation during the real world conversation. Real-time streams from individuals is the world of 2008. So the next time you’re in a meeting, see if anyone is Twittering. You never know, your every word may be reported on the internet in real-time."

How do you get merchants to accept mobile payments?

Whenever payment people talk about using a mobile phone to pay at a physical retailer, like Starbucks or Carrefour, the discussion will almost always gravitate towards the difficulty of convincing merchants to accept mobile payments. M