Sep 4, 2007
What does "We prefer MasterCard" mean? And what could it mean in the future?
You see this kind of thing all over Asia and in some other places as well. What in the world does it mean? Does this merchant only accept MasterCard? No. Do you get a discount if you pay by MasterCard? Sometimes, but most of the time you don't. Do customers even look at this sign? I would guess that I paid more attention to it than thousands of other customers all put together.
Imagine instead that this sign meant that you have to pay a surcharge if you use any card other than MasterCard. Sounds too farfetched? Think again.
Competition between Visa and MasterCard is heating up in ways that were unimaginable in the past. When both companies have to show strong growth to justify stock prices, they will need to find new ways to compete to get their brands on cards and get merchants to prefer their brand over others. The key to the whole thing is interchange. Merchants will be more accepting of interchange on brands that offer true merchant-centric features and they will increasingly be tempted to add surcharges on brands that don't offer any real benefit. When a brand is able to demonstrate that the fees it charges merchants are more structurally stable than those of other brands, card issuers will automatically prefer to put that brand on their cards.
Of course, there is another way to get merchants to prefer a payment brand over others: eliminate or drastically slash interchange fees on that brand. Theoretically, one could imagine that this strategy would increase merchant acceptance, and that greater acceptance would attract more issuers. But the jump in acceptance would be very gradual whereas the cut in interchange revenue would be instantaneous. It's difficult to see how card issuers could be happy with that.
The only real strategy is for payment brands to focus on making their cards much more useful to merchants, with new and unique merchant-centric features that justify interchange.