Loyalty card saturation – the elephant in the room

According to a recent report by Colloquy, each U.S. household has an average of 14.1 loyalty program memberships, up from about a dozen in 2006. However, just 43.8% of those programs are active, translating into 6.2 average active memberships per household. Less than half of loyalty cards are active!

“With the current economic climate, marketers must shift focus from growing their loyalty programs’ size to growing their value,” said the report.

The loyalty industry has been complaining about market saturation for several years already, but has still not come up with a viable solution. The focus always seems to fall back on the same action plan that the report also suggests, “prove program ROI, integrate loyalty data at the enterprise level, and design value propositions that will engage customers of high current and high potential value.”

In other words, engage customers through increased mailings and, especially, juicier rewards. But there are other ways to solve the problem, you just have to look at things from a different angle.

The fundamental problem has a number, provided by Colloquy: 14.1. How can you possibly carry 14 cards in your wallet? That’s just nuts! The most you really want to carry at any one time is also a number given by Colloquy: 6.2, carried by one or two people in the household. And even that number is scary to lots of people.

Loyalty practitioners are fighting an increasingly uphill battle trying to get their card to become part of that privileged few in your wallet. And most are using the same tools - increased mailings and bigger rewards.

Instead, Taggo looks at the problem from a completely different angle: put the cards on your mobile phone so you always have them with you. I am betting my money right now that activation will instantly go up with no need for juicier rewards or more mailings.

A counter-intuitive way to make mobile payments irresistible

Put loyalty and prepaid cards on mobile phones first, which will create the desire to have credit and debit cards as well, integrated into a single transaction. Going the other way, credit cards first, will be extremely challenging. The difference is the value proposition to customers and retailers.

The main promise of putting credit and debit cards onto an NFC mobile phone seems to be, "you can leave home without your wallet". That promise is impossible to deliver until the vast majority of retailers accept NFC payments. Customers still have to carry around their wallet, and, from the merchant’s angle, if customers have other payment methods on them anyway, the value of accepting NFC payments is limited. The promise is empty.

Some other promise is needed. How about, “tap your phone, instead of pulling out your wallet”? That promise can be delivered now, but is it really valuable? The difference between tapping your phone and pulling out a card is questionable in the vast majority of retail environments, except transit. The contactless promise was, “no more lines”, but removing the need for a signature on all transactions under $15 suddenly made traditional magnetic stripe transactions just as fast as contactless. Many people are working at linking the tap and go transaction to interactive information on the handset, to enhance the customer’s experience. Something may in time produce an exciting promise there, but there is a very high likelihood that it turns out that the value is in the application on the handset, and that the promise will be deliverable with traditional payment methods as well.

On the other hand, with loyalty and prepaid cards, Taggo’s promise is, "no more fat wallets". This is a much easier promise to deliver. As soon as one retailer is equipped, that retailer's card can disappear from your wallet. Poof. Gone. Whereas credit and debit cards will stay in your wallet for many years to come.

I see loyalty and prepaid cards going onto phones first, then pulling credit and debit cards on in a second phase. The promise for doing this would be, "no need to pull out a payment card when you use your mobile phone for loyalty".

Loyalty and prepaid programs as mobile content, like ringtones and games

I now look at loyalty programs, discount cards, prepaid cards, and other membership programs as mobile content, very similar to ringtones and games.

The same way that people today send a text message with a key word or code to get a ringtone or game sent to their mobile phone, customers can also add loyalty and prepaid card programs to their phones.

This is a paradigm shift that focuses on getting more people to join more programs. It is a very different outlook to the one that currently dominates the NFC industry where players are struggling with putting credit and debit cards onto mobile phones.

The process requires tremendous simplicity, and produces much greater value to retailers that are struggling to sign up new loyalty or prepaid card customers.

Imagine browsing through the Taggo website looking for new programs to join, and choosing between various retailers that you shop at. Imagine even being able to purchase prepaid promotions, like "Load $25 to your Starbucks Taggo account now, for the promotional price of $20". And the fee gets charged to your mobile account, just like when you buy a new ringtone or game.

This is a vision that is especially relevant to the large number of younger users that are already familiar with purchasing content for their mobile phones.

Hahaha! This innovation stuff is lots of fun!

Taggo now has a website

Check it out here.

Good leaders delegate, great leaders empower

This weekend, during a leadership training course I am doing here in Singapore, I had a breakthrough that helped me finally understand something important about empowering others. Top executives get to where they are by learning to delegate early in their careers. Many of us (raise my hand) tend to confuse delegating with empowering. I have had a nagging feeling for years that I could be much more successful than I am. This breakthrough begins to provide the answer.

At one point, there was a physically challenging exercise that was done in buddy pairs, where the team of two needed to accomplish something that is physically very daunting and scary. The exercise was structured in such a way that one person (me in this case) cannot get across a barrier without the help of the other person. It is designed to help discover how to let go and trust others. I knew my partner was paralyzed by fear and depended on me. I managed to get us both across, even though I should not have been able to succeed. I felt proud and happy, then had comments from many people, including Sally who was watching, about how I prevented my partner from growing and discovering her own courage, and how I had just wasted the opportunity to trust someone else and learn. I didn't understand what they were saying until that night, when it finally became clear.

I can get through the most difficult obstacles. Take my health away, my sight, my money, and I know I can still do big things. I know that I can carry many people with me to success, no matter my limitations. I already know that. And my courage becomes stronger when I am supporting people that act less courageously (or that I think are acting less courageously), as I rise up to fill the gap. I already know that too. This makes me look and feel responsible, big, strong, powerful and courageous. And it has brought a certain amount of success into my life. But I have always felt that I could have succeeded much more, and now through this breakthrough I am seeing how.

What I learned yesterday is that what I am actually doing is draining others of their courage and feeding off of it to build up my own courage. This hit me hard.

This isn't simply a question of delegating tasks and responsibilities. It goes much deeper than that, since it relates to my way of being and the pleasure I get from being responsible and courageous. It is about learning to use one's strength and courage to empower others to find their own strength and courage. I know this sounds simple. I have read about it many times. But there was something about doing this in a structured physical process, and especially with this particular partner, which brought it alive for me in a way that I have never experienced before.

I have always loved this quote from I don’t know where: “Bad leaders, people hate. Good leaders, people love. Great leaders, people say ‘we did it ourselves’.”

Great leaders empower others to find and exercise their own strength and courage.

American Express pays people $300 to drop their accounts

Now here's a new angle. American Express is offering selected customers a gift of $300 if they pay off their balance and drop their account. This is the exact reverse of a sign-up bonus or gift that credit card issuers have been offering for years.

More here.

(Thanks Wan Ling for sending this to me! And Alan Hale too!)

Startup adds mobile convenience and one-step enrolment to loyalty programs

Ok here’s what I’ve been working on. The patent was filed this week, so I can finally talk about it.

Taggo is designed to add mobile tap and go convenience and one-step enrolment to existing loyalty and rewards card programs in a very simple and cost-effective way.

Taggo

View more presentations from aneace. (tags: loyalty contactless)

Faced with the growing proliferation of loyalty cards offering points accumulation, cash back and discounts, retailers are finding it more and more difficult to convince customers to apply for their card and join the retailer’s loyalty program. Many customers already have too many cards in their wallets and prefer not to enroll in new programs. Customers that are already enrolled often leave many of their cards home, causing them to miss out on discounts.

The current method of enrolling customers consists of requiring them to fill out a loyalty card application form, sometimes accompanied by an initial payment or processing fee. The application form can be dropped off at one of the retailer’s stores, the application is processed and the card is sent to the customer by mail. The form can sometimes be filled out at a dedicated service counter in the store and the application processed immediately, allowing the card to be delivered to the customer on the spot so it can be used immediately. Drawbacks with the current methods include the hassle of filling out forms for each loyalty programme, waiting to receive cards in the mail, waiting for the card to be prepared at a service counter, as well as carrying additional cards in one’s wallet.

Many companies are developing ways to use mobile phones to replace all the cards in one’s wallet. An obvious solution is for retailers to re-design their loyalty programs to use the customer’s mobile number as the loyalty card number. But customers that already have the retailer’s existing loyalty card need to somehow transfer their benefits balance to their new mobile phone number ID, and, worse, retailers are required to modify their loyalty card numbering schemes to recognize mobile phone number IDs, something which is often difficult for retailers to do if their loyalty system has been in use for some time. A more elegant solution would be to allow customers to use their existing loyalty card numbers, with no change to the retailer’s numbering scheme, simplifying the process for both customers and retailers. In addition, and more to the point of why Taggo was created, these solutions still require customers to fill out forms and register for each retailer’s program individually, so there is no improvement on current enrollment practices.

Mobile phones equipped with contactless “tap and go” technology offer another partial solution. Referred to as NFC (Near Field Communications) this technology promises to convert mobile phones into payment devices that can replace all the cards in one’s wallet. There are currently two ways of implementing tap and go functionality on mobile phones. One way is to provide small stickers embedded with an NFC chip, that can be attached to mobile phones, while another way is to include the NFC chip as a built-in feature provided with the phone, much like Bluetooth and Wi-Fi capabilities. Both solutions offer some promise, yet both currently fall short of solving the problems addressed by the present invention.

NFC stickers always broadcast the same unique ID, which is essentially the same ID that retailers would normally include on their existing cards. NFC stickers provide a similar solution to that provided by barcodes on loyalty cards and key fobs, as the NFC sticker broadcasts a unique ID similar to a barcode account number. NFC stickers are sometimes even referred to as “NFC barcodes”, even though there is no actual barcode on the stickers. Current NFC sticker solutions (and even barcode solutions) do not simplify and streamline enrolment, as customers must still go through the normal membership application process consisting of filling out and submitting separate form for each retailer and waiting to receive each retailer’s sticker, fob, wristband, etc., and even attaching multiple stickers to a mobile phone. These solutions are simply a different form factor for existing plastic card based programs.

In summary, the practical utility of NFC stickers is currently limited:

Cards, stickers, tags, key fobs, etc., one for each retailer’s programme, need to be physically created and delivered to customers.

Multiple stickers need to be attached to the mobile phone, one for each program.

It is impossible to add new programmes to a phone without adding new stickers.

The enrolment process remains the same, since customers must enrol in each retailer’s programme.

Another partial solution consists of NFC chips built into phones and linked to “mobile wallet” applications that customers download into their phones for payment cards, loyalty cards, coupons and other information. The NFC chip inside the phone is more flexible than NFC stickers, for two reasons: a) the NFC chip inside the phone communicates with the mobile wallet application loaded in the phone’s memory, and b) the NFC chip can be caused to broadcast a different ID, depending on the virtual card that is being presented to a retailer’s point of sale reader.

Personalizing phones over the air with new applications has proven to be quite difficult. Many customers do not have Internet access built into their phones, and most of those that do, have never actually learned to load applications over the air. One solution has been to pre-load applications when the phone is delivered, but then only new customers can benefit.

Mobile wallets require NFC contactless chip capabilities to be built into phones and cannot function with NFC stickers, so they are limited to the few phone models with NFC built in. This is because the mobile wallet application communicates with the retailer’s point of sale system through the integrated NFC chip, broadcasting the customer’s card number for that retailer, rather than the single unique ID that is broadcast by NFC stickers. Since virtually no phones on the market currently have NFC capabilities built-in, the market for mobile wallets is negligible. And since NFC sticker products are unable to communicate with applications within the phone, there is no possibility to make a mobile wallet function with an add-on NFC sticker. Some combined products are beginning to appear, in which a much larger NFC sticker-type solution also includes Bluetooth connectivity to communicate with applications inside the phone, but these solutions are physically more cumbersome and more expensive than simple, thin NFC stickers.

The need to broadcast a different ID at each retailer creates other problems. The retailer’s card ID needs to be injected into the mobile wallet, creating similar difficulties as with over the air downloading of applications. Furthermore, when paying at the cash register, the customer must first open the mobile wallet application on the phone and browse through the virtual cards stored on the phone to pre-select the applicable one. Instead of fumbling through one’s traditional, physical wallet or purse, mobile wallet solutions now ask customers to fumble through their virtual wallets.

In summary, the practical utility of mobile wallets is limited:

Personalizing phones over the air with new applications or new programme data is very difficult.

There are still a very small number of phones with built-in NFC contactless chips.

Mobile wallets cannot function with low cost NFC stickers because there is no communications capability between the sticker on the phone and the mobile wallet application inside the phone.

Customers at the cash register need to open the mobile wallet application on their phones and pre-select the appropriate virtual card when they pay.

It is doubtful that mobile wallet systems could be easily modified to overcome these drawbacks. Using a mobile phone to replace all the cards in one’s wallet has been something of a holy grail, and many people have been working on this, yet none of the current solutions avoid the problems described above. None of the existing mobile wallet solution providers even suggest the possibility of an extremely simple enrolment process, as all of these solutions require a physical connection with the phone for downloading new program data. Likewise, none of the NFC sticker solution providers evoke the possibility of using a single sticker for many different independent programs, despite the number of companies working in this area and the many people that must surely be aware of the drawbacks of requiring customers to attach multiple stickers to their phones.

A unique and innovative combination of some parts of each of these types of NFC technologies could be used to produce a simple and elegant solution when also combined with a smarter contactless reader configuration and another, unrelated technology: SMS text based ordering. Many advertisers invite customers to use SMS text messages to participate in promotions, enter sweepstakes, and request samples. Customers are asked to text their name, address and other details to a special number to participate. This technique of ordering products and services and participating in promotions through simple SMS text messaging does not in itself solve the problems addressed by Taggo, but it does provide an element of the solution when combined with some elements of both NFC stickers as well as NFC chips embedded within mobile phones, in addition to enhancements to current contactless reader configurations.

That’s what Taggo delivers.

Crisis gives national banks an upper hand in payments

I have been thinking a lot about how the crisis is having a different impact on the world’s national banks, which don’t seem to be suffering as badly as the big international players. In the cards and payments business at least, national banks may be able to take advantage of the crisis to get ahead while big international players struggle to survive. Welcome’s customers tend in large part to be national banks, so this is an area that I have been following heavily.

Here are a few comments I pulled out of an interview Friday with Dennis Gartman, producer of The Gartman Letter, a daily commentary on the global capital markets subscribed to by banks, broking firms, hedge funds and mutual funds.

DG: There will be more consolidations; there has to be. But look at the yield curve—what a year to be a bank! The overnight Fed funds rate, the rate banks are going to pay depositors for their demand deposits or checking accounts is zero. And you’re going to be able to lend that out to hungry borrowers at 7%, 8%, 9%, 10% and 12%. The next three years will be the greatest three years banks have ever seen. Banks will just make money hand over bloody fist in the next three years.

TGR: Are you talking about the big boys?

DG: No, I’m talking about the regionals. The big boys have problems in toxic assets. I am not even sure there is a Peoples Bank & Trust in Rocky Mount, North Carolina, but a bank like that—or the First National Bank of Keokuk, Iowa or the First National, or the Peoples Bank & Trust of Park City, Utah—those are the banks that are going to make lots of money.

TGR: Do you see an explosion in regional banks? Will move of them come into the marketplace?

DG: I think we’ve probably got all we need. It’s just that they’re very cheap.

TGR: What will the role of the international banks be?

DG: Mopping up the disasters that they’ve created for themselves for the past decade, trying to survive, being envious of the decent regional banks that are going to be earning enormous yields on this positively sloped yield curve and wishing they were they.

TGR: Do you see a role long term for international banks?

DG: Oh, sure, of course. How could there not be? It’s a smaller world; it’s an international world; it’s a global world. International banks will be back in full force a decade from now. They’ve got some wound-licking to do, and they’ll do it.

The same thinking appears to apply to national banks in the rest of the world, organizations that somewhat resemble regionals in the US, especially in the way they compete with the international banks. I have been watching how Welcome’s customers have continued moving forward with their credit card loyalty programs and in some cases have even accelerated those programs.

Many of Welcome's bank customers have another distinct advantage over the large international banks. They are both major card issuers and at the same time major acquirers, having kept acquiring as part of their banking activities while the international players have gotten out. Consumer shifts from credit cards to debit cards and prepaid will have less of an impact on a bank that is still active in acquiring. More importantly, owning the full end-to-end payment experience makes it much easier for local banks to innovate and provide greater value to customers and merchants.

Keeping issuing and acquiring under one roof suddenly seems much less risky than focusing single mindedly on credit card issuing alone.

Q&A with Shawn Miles, MasterCard: "The continued availability of credit is helping retailers drive transactions"

MasterCard recently published a report, “Benefits of Open Payments Systems and the Role of Interchange.” (direct link, background). I interviewed MasterCard’s Shawn Miles, Group Head, Global Public Policy and Regulatory Strategy Counsel.

Aneace: One of the benefits of interchange is that it helps fund innovation, and we have definitely seen in Australia that lower interchange means lower innovation in the card industry. However, much innovation seems to be focused on benefits for card issuers. Since interchange is paid by merchants, what kind of interchange funded innovation focuses on merchant benefits instead?

Shawn: We think that our payments network itself is a huge innovation that benefits merchants every day considering the complexities and costs merchants would have to undertake to run their own card programs. But one very good specific example of an innovation that benefits merchants tremendously is PayPass, the "touch and go" technology that provides merchants who benefit from improved speed of transactions, like fast food restaurants, transit systems, vending machines or taxis. Our Time and Motion study indicated a 52% increase in speed over cash payments. Not only do merchants benefit from the increased speed of people moving through their stores, but research shows people spend more when they use PayPass - and even New York City taxicab drivers are admitting they're getting higher tips when people use PayPass.

Aneace: Given the credit crisis today, and given the loss of revenues that many retailers are now facing, one could imagine two very different scenarios regarding interchange. One would be that merchants will now fight even harder to reduce their costs and cut interchange fees. But another opposite scenario might be that merchants will be more open to paying interchange fees for transactions which they might not have made if cards were not available. Which scenario do you see playing out?

Shawn: Some merchants may only want to focus on cost, rather than benefits. We certainly recognize that, particularly in this environment, everyone wants to lower their costs of doing business. But you're absolutely right that the continued availability of credit is one of the things that is helping drive transactions, even more so in this environment than in general, and we would hope that some merchants will recognize the benefits they're receiving from accepting payment cards. One of the reasons we produced this brochure is to remind people, including merchants, of the enormous benefits that open, four-party payments systems bring to the economy and society.

Aneace: Retailers seem to understand that there are costs involved in offering card payment services, and say that they are willing to cover a certain level of interchange for those costs. However they don’t like the idea of card issuers using their interchange revenues to fund their own loyalty and rewards programs. How do you see this trend evolving, especially given the current financial climate?

Shawn: Merchants are the ultimate beneficiaries of so-called "premium" cards, as there's ample evidence that people who use them spend more, so merchants’ revenues are higher. According to Nilson Report issue #898 from March 2008, as part of a report/article on “Merchant-Funded Rewards Programs”, “the average monthly spending on a credit card with no rewards program is $465. That figure increases to $890 for a rewards card.” So the Nilson data shows that the affluent shoppers who use these cards spend, on average, double what people using standard cards spend. That's a pretty big benefit for the relatively low cost of acceptance.

The interchange wars are over … for now

Many people have been after me for not keeping up with my blog. When the crisis hit everything changed. Things I was writing about suddenly seemed less relevant. Today, I can see more clearly that there are still many topics that are relevant, and even more so now, while there is at least one really big thing that is much less relevant. Interchange wars.

One could imagine that some retailers might fight even harder now to reduce interchange, but I don’t believe that this will be the case. Instead, retailers are happier than ever to have a customer come in and buy something, even if they must pay interchange, which now seems like a pittance in comparison to the huge discounts that they are giving. I’ve heard recently that stores all over the UK are offering 70% discounts.

In a sense, we are going back to the original benefit of credit cards for retailers a few decades ago, where retailers were happy to pay 5% or more for facilitating a fully paid purchase. Now that credit is harder to come by, a credit card customer suddenly becomes much more valuable than a few months ago. And a premium card customer even more so, justifying the even higher interchange fees on premium cards.

I also explored this topic in an interview with MasterCard’s Shawn Miles, Group Head, Global Public Policy and Regulatory Strategy Counsel. Watch this space.

I am a very stubborn man. Those who know me will tell you so. But hey, I'll change every once in a while when something big comes along. It's my blog, right?

Crisis: much of the traditional thinking in rewards programmes will be useless

Banks have already substantially cut credit limits and it seems obvious that they should be giving out fewer cards than in the past, but you can’t really tell this with all the credit card marketing still happening in Singapore’s shopping districts. Will banks continue promoting card usage and credit consumption as the crisis grows, or will rewards programmes now focus much more heavily on other objectives?

In the past, banks targeted ‘revolving’ credit card customers as a key revenue driver. However, the credit crisis is reversing this process and banks are keen to boost their deposit base. This could create a new loyalty model where financial institutions reward consumers depending on the level of funds deposited with them, instead of encouraging more credit card usage. Some banks will likely dabble in this, but it will take a while for any type of mainstream development to come out of it.

Another impact of the crisis could be the final, total separation of card payments from other banking activities, where payment processing becomes even more of a third party activity, leaving card issuing and customer account management alone within the bank's walls. This would further highlight the imbalance of costs, where the majority of fees paid by merchants flow to the issuer and leave such a tiny amount with processors that no real merchant-centric innovation is currently possible. When was the last time you saw a meaningful R&D line on an acquirer or processor's P&L statement?

The December issue of Lafferty Cards Insider has an article on redefining rewards in today’s credit crisis.

“As the global financial crisis escalates, loyalty service providers are facing growing pressure to overhaul their rewards programmes by cutting costs wherever they can. Greater scrutiny of interchange fees is further intensifying the pace of change, which is likely to result in alternative funding strategies and an increased focus on retaining ‘good’ customers.”

A very interesting article.

In the meantime, I am putting more and more of my energy into my new loyalty related start-up project that helps retailers deal with the crisis better.

Mobile tap & go loyalty wallet - market research survey

I have just finished compiling the results of an early, exploratory on-line survey I ran recently here in Singapore, testing the market for a mobile tap & go startup project that I am working on. Then, bang, synchronicity! I just got an e-mail from Aite Group on a survey they recently did in a similar area.

My survey explores how customers deal with lots of retailer loyalty and discount cards, and the hassles of carrying around an increasing number of cards, while the Aite survey “provides insight into the demographics and attitudes of consumers who choose credit cards based on rewards programs, and sheds light on the other factors that drive consumers to select one card over another”. Basically, the difference in focus being retailers versus financial institutions.

Aite suggests that card issuers need to create a more convenient product for customers in which a single bank card can aggregate lots of different programs:

"It is clear that most rewards cardholders possess multiple rewards cards," says Ron Shevlin, senior analyst with Aite Group and author of this report. "As issuers look to one-up each other with ever-expanding rewards, Aite Group believes that there's an opportunity for issuers to differentiate themselves by creating a rewards hub that enables cardholders to aggregate and integrate programs."

I agree with the general premise of this advice, but I don’t believe that a financial institution can offer a truly convenient solution to the problem. Hence the work I have been involved in.

Want some of the results of my survey? It turns out that 70% of shoppers in Singapore have over 3 loyalty or discount cards, and 40% have over 5. Those tend to be almost exclusively women, almost 9 in 10. Men simply can’t carry around lots of cards in their wallets, unless they start carrying purses.

People with lots of cards are definitely interested in solutions to the fat wallet problem. 56% of these customers declared that they would be “very interested” in a mobile tap & go wallet that would let them register all of their loyalty cards on their mobile phones, so that they can just tap their phones when they shop instead of presenting their cards. In the future, I want to look at men’s behavior more specifically, to see if interest in joining lots of retailer loyalty and discount programs would go up substantially if fat wallets (and purses) are no longer needed.

Oh yeah, here’s an important piece of data: a huge 62% of loyal shoppers declared that they would be “very likely” to prefer shopping at a store that allows them to tap their phones, versus a similar store that requires card presentation. Retailers that make it easier to participate in their loyalty programs will clearly attract more customers. Some retailers will take this insight and try to create a mobile wallet that only supports that retailer’s loyalty card, which is already being talked about in Europe with some of the largest retailers. Those projects will ultimately fail because only the most loyal customers will dedicate their mobile phones to a single retailer. But hey, you know that some big retailers will absolutely have to spend lots of money trying to do that, right?

Aite is selling their survey for lots of money. Mine was done for my own use, but if you want to buy it let me know and I’ll dress it up a bit like the big analysts do and sell it to you real expensive. Just kidding! (Well sort of, contact me here if you’re interested in what I’m working on).

Report: Rewards programs are even more crucial for credit card issuers today

Research firm Aite Group has just produced a report on how the credit crisis will make credit card rewards programs even more crucial than they already are. Instead of simply saying that credit cards are the next bubble to burst and how customers are moving away from credit cards, this report attempts to go into more depth and starts to offer some visibility as to what the industry may look like once the dust settles.

"Credit card issuers are going through their most turbulent times since the introduction of credit cards. Potential new legislation and regulation threatens to reshape their business model, and issuers are facing rising charge-offs and a continued assault from merchants lobbying to cap or reduce interchange rates. Meanwhile, issuers must continue to deal with day-to-day challenges, such as new customer acquisition, card activation, and customer retention and card usage. In that context, issuers expect rewards to remain front-and-center to their strategy - notably merchant-funded rewards that alleviate issuers' reliance on interchange funding."

Phone wallet - do I need one?

Here's an interesting article in NetworkWorld, titled I need a 'wallet phone' why?

"Last night on my drive home I stopped at a Boston Market take-out restaurant and here's how I paid for my family's dinner: I handed the counter clerk my American Express, she swiped it through a card reader, and handed me a receipt. There was no PIN to enter and nothing to sign. Couldn't have taken 15 seconds.

"Would waving my cell phone at a wireless reader have been easier? Not for me, because I don't normally carry my cell phone. But, yes, I suppose those who do might have shaved a few seconds off that less-than-15-second transaction.

"And what's the value of that? About as close to zero as I can imagine."

Building true loyalty - helping customers when they really need it

Here's a positive thought after this past week. A veteran banker writes:

"We need to stop for a moment and recognize that even if we do have the biggest challenge since the Depression, it has also presented us with possibly the biggest opportunity to build relationships with our customers that we’ll ever see.

"When I was a very young banker in the 1970s, I spent some time trying to sell small family businesses on the idea of moving from Bank of America to the community bank for which I was working. I heard more than once that they wouldn’t do that because during the 1930s depression, A.P. Giannini loaned them, or their parents, money that helped them stay in business. They still remembered it 40 years later.

"Now it’s your chance and your opportunity. Helping customers when they really need it – isn’t that why you got into banking to begin with?"

Check out the full blog post here.

EFMA 2008 conference presentation, Paris

Here's the presentation that I gave at the EFMA conference yesterday.

Haddad Efma Sept 2008

View SlideShare presentation or Upload your own.

A water pipe broke in the ceiling right above my head while I was waiting for my turn to speak, delaying the conference by 45 minutes and drenching my suit jacket and shirt. Maybe I should tone down all the talk about interchange!

Interchange regulations make credit card surcharges increasingly common

If you want to see the real-world impact of interchange regulations, the best place to look is obviously Australia. This is a country where the most sweeping changes to the interchange model have taken place, a country seen by regulators everywhere as something of a model to learn from.

If you can’t go to Australia to learn first-hand (maybe you've been trying to convince your boss to let you go, but he hasn't said yes yet), another way would be to look at the work of Australian research firm, East & Partners. They recently released a report, titled Australian Merchant Acquiring & Cards Markets, which shows how bad surcharging on credit card transactions has become. (See the report brochure here and the firm's press release here.)

“Surcharging is most common at the top end of town where up to 26 percent of merchants have already introduced surcharges and a further 38.7 percent are planning to do so in the coming months. In theory, the rise in surcharging should produce a shift from credit cards to other forms of payment which are relatively less costly.”

I’m looking forward to seeing the firm’s next report, which I imagine would begin to show whether or not this shift actually happens in a meaningful way.

"Dang it, Aneace!" you say with understandable anger. "Now I definitely can't convince my boss to let me go to Australia!"

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.

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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.

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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.