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.”