Aug 26, 2007

Pressure from retail association kills plans to increase interchange on debit cards

How easy is it to get away with charging more for the same old debit card service without offering anything fundamentally new? No new features that benefit merchants, just new, higher interchange rates? It might have been possible to get away with this in the past, when debit card usage wasn’t so high. But now it’s getting much harder. And this is forcing the payment brands to search for new ways to compete against each other.

Pressure from the British Retail Consortium has lead to the withdrawal of plans for increased interchange fees to go with the launch of the new Debit MasterCard. The new debit card product was to be charged to merchants at a fixed fee of 3.5 pence plus 0.15 per cent of the purchase price, potentially much higher that the current method of simply charging a fixed fee for debit transactions in the UK. See MasterCard backs down over retailer fee.

MasterCard’s attempt was totally understandable and justifiable, given the increased competition between payment brands. MasterCard needs to launch new payment products with higher interchange that will get the brand onto banks’ cards. This is becoming more vital today than ever before, since MasterCard is a public company that must show strong growth. With Visa’s IPO coming in a few months, pressure will only increase. Very soon, we should begin to see a major change in how the payment brands compete with each other, with a much greater focus on providing more value to merchants in order to justify higher interchange fees. The payment brands have no choice but to focus major efforts on that battleground.

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