Dec 15, 2006

Using the same old interchange pitch over and over again, yet hoping for different results

“Insanity is doing the same thing over and over again yet expecting different results.” Does anybody know where this quote comes from?

Peter Madigan, Director of the Electronic Payments Coalition, tries to explain in a letter to the editor why interchange is justified and why merchants are wrong to complain about the fees. He describes interchange fees as “one of the merchant's costs of doing business similar to packaging, marketing, employee salaries, etc.” He argues that “Merchants receive extraordinary benefits from accepting electronic payments, including increased sales, an expanded customer base and immediate, prompt payment for goods and services.”

These are the exact same benefits that have been touted for years, with no change, despite the fact that merchants are not buying the story in the same way anymore. The story has got to change. You can’t simply say the same thing over and over again, louder and louder, keeping your ears closed so as not to hear customer complaints (yes, merchants are customers, they are paying interchange fees, so their complaints need to be heard) and hoping that this time merchants will finally hear and understand that they should simply accept the fees without complaining.

Here is the opposing viewpoint in a press release from the Merchant Payments Coalition: "Processing - the original reason for interchange - comprises only 13 percent of interchange costs. Meanwhile, the largest component of interchange, paying for issuer rewards programs, accounts for 44 percent of interchange costs, but merchants get nothing out of these programs. Given the merchants' lack of perceived value for what they pay, the situation is clearly unstable."

Mr. Madigan should be providing answers to these complaints, rather than repeating the same things over and over again. Card issuers have to give more value to merchants than the few benefits Mr. Madigan mentions. If they don’t, interchange revenue will shrink. Merchants will find ways to get around the fees. If not through litigation, then through steering, surcharging or through alternative payment services or via some other brand new approach that hasn't been invented yet. Mr. Madigan and the companies that fund his organization need to understand that merchants are putting lots of effort into finding ways to get around interchange. It is only a matter of time before they succeed. Ignoring their complaints and sticking to the same old arguments and the same old benefits is not really the best solution.

The very best solution by far, probably the only solution, is to give merchants more benefits than today, much more benefits. Make payment much more valuable to merchants than it is today, because it is clearly not valuable enough to justify high interchange fees that are used primarily to fund card issuer loyalty programs.