May 12, 2006

The interchange industry is bigger than ...

How big is the payments industry if you leave out loan revenue and simply look at fees paid by merchants and consumers for the convenience of using plastic? The bulk of that revenue consists of interchange fees paid by merchants to card issuers.

From this perspective, payments are a $40 billion industry in the US alone.

Much bigger than the electronic game industry ($28.5 billion worldwide).

Much bigger than Hollywood box office sales ($23 billion worldwide).

Bigger even than the music industry ($30 to $35 billion worldwide).

Bigger than venture capital investments worldwide ($31 billion).

Bigger than the microprocessor industry ($35 billion worldwide).

And almost as big as biotech ($48 billion in the US).

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 payments experts debating the impact of new payment products on interchange pricing and on merchants' desire to pay to accept plastic cards? 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.

I think the payments industry will soon be much more focussed on this area, simply because banks have to protect and grow interchange. They can't leave that job to lawyers. They have to focus on product again, this time from the merchant's perspective. Banks have no choice but to begin looking at merchants as customers, the only way to protect and grow the huge interchange industry. This shift in mindset could create a very different looking payments industry in a relatively short time.

As a side note, US biotech companies spent $16 billion on R&D last year, presumably to protect and grow their $48 billion industry. Did anyone see even a few billion spent on protecting and growing the interchange industry last year?


Anonymous said...

I'm wondering where you got that $40 billion figure for 2005 interchange fees in the US. According to my data, the 2004 figure was $24 billion, and it's hard to believe that card volume almost doubled in one year--especially with debit taking such a big bite out of credit.
Andy Reinbach

Aneace Haddad said...

It depends on which angle you take. Since interchange is something paid by merchants to card issuers, I am looking at things from the merchant community’s perspective in order to understand how big this is as an industry. I’m not looking at it from the supplier side (i.e. the companies that get paid, meaning the card issuers). I’m looking at it from the buyer side (i.e. the companies that pay, meaning merchants).

How much do merchants pay to card issuers for card acceptance? To all card issuers, not just to Visa and MasterCard banks, but to American Express, Diner’s and any other issuer whose cards they accept. The total is around $40 billion, according to various estimates provided by merchant associations. They also pay processing fees on top of that, perhaps 20% or 30% over that total amount. But I’m not looking at the acquiring/processing industry here.

Although merchants do buy around $40 billion worth of card acceptance services from card issuers in the US, I do agree that this is not actual “interchange”, strictly speaking and looking at things purely from the banking community’s perspective. But we’ve gotten into lots of trouble looking at things purely from the supplier side. It’s time we got better at understanding things from the buyer’s side. I’m not sure what else to call that industry. Interchange seems to be the best word available today. Merchants tend to use it to lump together everything they pay to card issuers. And I really don’t feel up to coining a new word all on my own to describe this huge industry. Do you have any suggestions that would be better, but just as easy to understand looking at things from merchants’ point of view?

I really appreciated your comment. Thank you sincerely for reading my blog and taking the time to post a comment.



VIP cards said...

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