Jul 30, 2006

The Merchant-Bank Struggle for Control of Payment Systems

I just found this article written by attorney Adam Levitin, titled The Merchant-Bank Struggle for Control of Payment Systems, published in the September issue of the Journal of Financial Transformation.

The article reviews the factors behind the struggle between merchants and banks, and explores the potential impact of new payments technologies and structural changes such as MasterCard’s IPO. Mr. Levitin uses a couple references from my blog, which obviously flattered me.

Here are several short quotes which I found interesting. The full article is worth reading for a clear and concise overview of this subject.

On the factors behind the struggle between merchants and banks:

“The rising cost, number, and percentage of payment card transactions have combined to squeeze many merchants’ profit margins without providing any corresponding increase in the benefits of card acceptance.”

“From a merchant’s perspective, payment services should be commoditized. Payments are the ultimate transaction cost. Merchants do not see the bundled rewards or credit card interest rates and no-surcharge rules only mask point-of-sale price to consumers, not merchants. The non-price differences to a merchant between card brands and card types are insignificant. Therefore, merchants expect competition to be on the basis of efficiency and price. Yet, it is precisely the ability to treat payment cards as commodities that the card networks’ rules curtail.”

Can the bank card associations offer more than financial services?

“The energy spent on the struggle over payment costs may not matter because the scope of the bank-merchant relationship could change to allow new pricing parameters and a mutually beneficial relationship. The expansion of electronic payments has created the potential for banks to provide more than financial services. With the growth of electronic payments, banks are poised to provide information services to merchants as well.”

“Consumer data has tremendous value for merchants. Properly analyzed, it can be a highly effective marketing tool. Paper payments do not readily lend themselves to data mining, but electronic, card-based payments do. To capitalize on payments data, however, banks and merchants must adopt cooperative strategies. The banks are in the best position to capture and mine the data, but the data is primarily valuable to the merchants. This situation creates an opportunity for banks to expand their supporting roles for merchants.”

A wake-up call for banks and payment technology suppliers:

“Innovation has long been a problem for payment card companies. There have been relatively little changes in cards over the past quarter century. Some improved security features have appeared, and PIN-based debit cards have emerged, to be sure. The essential concept and technology has remained the same, however, since 1979, when electronic dial-up terminals and magnetic striped cards that made payment cards an electronic payment system and offered noticeably decreased transaction time. The card companies have been trying to change this of late, with the introduction of contactless cards that decrease transaction time and increase spending. It is unlikely that contactless cards will be sufficient, though, for merchants to feel that they are getting enough new value out of card acceptance to justify increased card acceptance costs. Unless MasterCard and Visa can offer merchants increased payments value, either through technology or through bundled information services, their businesses will start to look a lot like landline telephone companies that have clung on to a core business, but are becoming obsolescent in the face cellular and VoIP technology.”


colin said...

I enjoy your blog, and this paper is evidence that the systemic issues impacting payments are large and outside most banks control.

Banks need to understand howto provide opportunities to personalise and improve the customer experience at the point of payment, even though they may not control large parts of the payment network.

Incidentally, SSRN is a great reference source, so thanks for that.

Aneace Haddad said...

Thanks for your comment. Here is another paper that is also very interesting.

The Anti-Trust Superbowl: America's Payment Systems, No-Surcharge Rules, and the Hidden Costs of Credit

John Januszczak said...

I liked your commentary on how banks could provide information services besides financial services. You mention that "Paper payments do not readily lend themselves to data mining, but electronic, card-based payments do."

With most cheque processors (in the US anyway) capturing images of the cheques deposited (be it for image exchange or archive) the ability to lift data from paper payments beyond the MICR line and amount already exists (e.g. you could capture the cheque writer's name and address). I recall an article mentioning how a US bank is doing exactly such a thing. This would allow for the data mining you mention off of paper payments.

Given the recent popularity of remote deposit capture with corporate clients (i.e. merchants) the collection of such data from paper payments is perhaps even easier.

Aneace Haddad said...

Actually, all the comments in quotes are from Adam Levitin, who should be the recipient of your kind remarks. Certainly not me.

Thanks for visiting my blog. I appreciate your comments.

John Januszczak said...

You are completely correct, my comments were meant to be directed at the material quoted from Adam Levitin. My apologies for attributing the commentary to you.

You did, however, pick out some great ideas from his paper and I just wanted to weigh in on the fact that Adam Levitin's data mining/bank as information service notion goes beyond electronic payments using existing technology.