Interchange value differentiation versus price differentiation

Several of my presentations include a quote from an article in the American Banker:

“Historically, MasterCard and Visa were mirror images of each other. Visa should spell out if and how it plans to differentiate its interchange strategy, the markets and business it intends to cultivate, and the information-based services enhancing its customers’ profitability.”

The article is titled “Lessons Visa can learn from MasterCard’s IPO” and was written by Eric Grover of Intrepid Ventures. In my attempt to create simple uncluttered slides I made the mistake of not including his name. Not a good excuse I know.

In another article, “Valuing Visa”, Eric further develops the need for Visa and MasterCard to differentiate their interchange strategies instead of simply copying each other. He paints a rosy post-IPO future for Visa, notwithstanding what he calls a huge blemish:

“Visa’s European Union region will not participate in the IPO. While Western Europe is the slowest growing major card payments market, it is Visa’s second largest region."

“European banks too would benefit from a vigorously competitive Visa. However, they have always been more comfortable with clubby, association governance and having a sleepy, pliant, reliable utility network. Moreover, an independent Visa could hurt banks insofar as it served mobile-phone operators and retailers directly."

“With its separate European business Visa will be clumsier and slower than MasterCard in adopting new strategic initiatives and adapting to a changing payments landscape.”

While I’m on the same subject, it is interesting to watch how the payment schemes are organizing themselves to potentially deal with differentiated interchange strategies. Visa’s web site provides a short profile of William M. Sheedy, who carries the title Executive Visa President, Interchange Fee Strategy.

“Bill Sheedy, executive vice president of interchange strategy for Visa U.S.A., is responsible for managing Visa pricing and product profitability strategies. His priorities include expanding merchant acceptance and consumer usage of Visa, while maximizing Visa member revenue within the Visa interchange fee structure. Sheedy also oversees areas responsible for industry cost and revenue studies, merchant incentive programs, and improving the point-of-sale operating performance of Visa products.”

“Interchange is meant to balance both the issuance and merchant acceptance of Visa products in order to reflect the costs to operate the Visa payment system and maximize the long-term industry revenue streams. Sheedy's role is key in the support of Visa product and brand strategies, as well as other initiatives that are critical to realizing long-term growth potential.”

I am not familiar with other similar executive positions in other organizations or other Visa regions, but I understand that if it is needed in the US, you can expect to see similar roles eventually being defined elsewhere.

Are international card schemes better equipped than domestic schemes to win SEPA market share?

Welcome’s Pierre Boces has published a whitepaper that compares strategies for payment scheme competition on the new SEPA battleground.

“Domestic card schemes have yet to get to grips with the challenges that they are likely to face with the SEPA Cards Framework. Still thinking as processors, they remain focused on saving costs for European issuers rather than offering value-added services and innovation.

“Meanwhile, international card schemes are mastering the subtleties of interchange pricing models and have launched a multitude of products worldwide. They appear better equipped to offer payment products to European issuers that will increase revenues through higher interchange.”

Mobile banking won't lead to mobile payments

This was on Javelin's blog this morning.

I always cringe when I hear people use the terms mobile banking and mobile payments as if they were both one and the same thing. There are conferences titled "Mobile banking and mobile payments" but when you look at the actual topics everything is pretty much mobile banking. Now, James Van Dyke at Javelin has just done a blog post on this exact subject.

The belief that when people start looking at their bank accounts with their mobile phones more often, they will automatically also want to use their mobile phones to pay, has always felt like sloppy thinking. Managing your bank account and paying at a retail outlet are completely different things, from a usage standpoint.

Making Visa payWave the preferred contactless brand in Asia (seminar presentation with audio)

Last week I posted a seminar presentation exploring how a new generation Maestro debit card product, with built-in features that create lots of value for merchants, could compete better in the bold, new post-SEPA European market. I promised to do other pieces on other card brands if people showed enough interest in the Maestro presentation. I got record numbers of visitors to my blog for that post, and lots of comments by e-mail, so there's your answer. Away we go.

To balance things out and turn the tables around, here's a similar presentation that looks at the same question but on Visa payWave cards. How could a new generation Visa payWave contactless card compete better against MasterCard's PayPass, through value-added payment features for merchants? This presentation looks specifically at the Asia-Pacific market, with a little more focus on specific promotions in that region.

Gartner: payment schemes need to offer merchants new promotional marketing capabilities at the POS to reduce pressure on interchange

ONLY 10 MORE DAYS to view this valuable Gartner report for free! Then we have to take it off our server.

Gartner has recently published a report, titled “Banks' Retail Payment Operations at a Tipping Point”, which we found so interesting that we obtained the right for you to view it.

Here are some of the report’s recommendations for banks:

“Introduce PIVAS [Payment Information Value-Added Services] to reduce pricing pressure from merchants and initiate a virtuous circle for retail payment operations. Merchants must actively support card programs and emerging payment solutions, but they are challenging the pricing model for the interchange. It's time to introduce services such as PIVAS to convince them of the real value of bank-sponsored retail payment networks.”

“An EMV-compliant card would store cardholders' shopping patterns on the chip (for example, how many times the cardholder has used a card at a specific retailer or whether the person has shopped at that retailer).”

“As a result, the retailer will have a platform to deliver tailored promotions at the POS that account for its marketing strategy and the activity and preferences of the customer. The promotion or message can be delivered via a POS receipt.”

Click here to view the report now.

Finally, an ad about new ways to protect interchange!

This ad is going into the EFMA conference guide for a Paris event at which I’ll be speaking next Tuesday.

This is probably the first advertisement in the world that specifically addresses interchange protection through new, merchant-centric payment features. As far as I have seen, most other interchange related ads have focused on litigation and stressing the unjustness of merchant complaints. I expect that several years from now, lots of companies are going to be promoting features, products and services that also protect interchange. But for now, this may possibly be the very first advertisement of its kind. It seems clear and simple now, but it has taken several years to get the message into this format. And it can still be much more powerful.

In the past, Welcome has mostly worked with individual banks that use our software in a closed loop issuer-acquirer network that helps the bank enhance its relationships with both cardholders and merchants. In that environment, the value proposition and ROI are based on protecting the bank’s fees, recruiting cardholders and merchants faster and easier (and at lower cost) and encouraging usage.

Today, we are working more and more at the payment scheme level, helping to make payment brands more attractive to merchants. The value proposition and ROI now are based on protecting interchange fees, recruiting issuers and acquirers faster and easier (and at lower cost) and encouraging usage.

The positioning described in this ad is a quantum leap forward.

For a more complete understanding of where this all leads to, check out the presentation on what a new generation Maestro card would look like (see Making MasterCard’s Maestro the preferred debit brand in post-SEPA Europe).

Making credit and debit cards more valuable in the Philippines

Robinsons supermarkets in the Philippines are offering customers a cash rebate that looks a lot like promotions you might get anywhere else in the world, until you look closer and see an interesting difference in how the rebate is actually delivered.

“Get 100 pesos back for every 5,000 pesos accumulated purchase at any Robinsons store.”

The promotion is clean and simple. There is no need to collect receipts across multiple transactions and submit them to a cashier, which is the way customers usually have to claim traditional rebate discounts. Here the credit card chip keeps track of the customer’s spending then automatically applies a receipt discount when the customer has reached a 5,000 pesos threshold.

The newspaper ad in this picture highlights something else. When you simplify the promotions process for the retailer and make credit and debit cards more attractive and valuable, the retailer actively encourages customers to use their card to pay. In this example the promotion is only for BPI Credit Cards. In other examples, the retailer will be able to offer promotions to a larger group of customers, say all MasterCard Maestro cardholders (see “Making MasterCard’s Maestro the preferred debit brand in post-SEPA Europe”).

We want to help payment brands offer valuable features to merchants, so merchants encourage customers to use that brand over others, interchange fees are easier to justify, and the brand is accepted by more banks. Our customers are now beginning to provide data on how Welcome’s approach can help payment brands dramatically increase market share.

Making MasterCard's Maestro the preferred debit brand in post-SEPA Europe (seminar presentation with audio)

How could a new generation Maestro debit card product, with built-in features that create lots of value for merchants, compete better in the bold, new post-SEPA European market?

This presentation has audio linked in, so it is just as if you were at a conference. Well OK, not quite, because I can't offer you the coffee and fantastic cookies that you usually get. But hey! It's free, and you don't even have to leave home!

I want to do others like this to show how Visa's Vpay debit product might compete in Europe, or how an EAPS product would compete. I also expect to do full audio seminar presentations on contactless products like Visa payWave and MasterCard PayPass, as well as pieces on premium cards. That is, if people are interested enough after this one.

I hope you enjoy this.

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.

Merchants comment on contactless, and why it is important to make contactless more valuable to merchants

I am often asked where I got some of the merchant comments and data that I use in my conference presentations on contactless. Many of them are from Card Technology articles, which I have commented on already (see London Contactless Launch: Where Are The Merchants and Contactless in America: Slow adoption due to lack of merchants interest - what to do about it?)

Others were from a contactless forum hosted by the Federal Reserve Bank of Boston a few months ago. See the Payments News article here and the agenda and links to presentations here. The key merchant presentations were from Dunkin’ Donuts and CVS/Pharmacy. Here are a couple slides that stand out.



Speed is of course the first item in the list of pros. Increased basket is another benefit, though it appears that this one is still under question. It is important to note that the rest of the benefits are temporary and only relate to the technology being new. The cons are more worrisome. CVS/pharmacy appears to want to dispense with signatures on higher transaction amounts, not just low value purchases. They also are comparing the costs of interchange to the costs of cash. The remaining issues are related to the technology being new.

Here is a slide from Dunkin' Donuts.



In essence, they don't see demand yet from customers, but are ready to include contactless as part of their ongoing upgrades of POS equipment.

Also check out this blog post that shows that when merchants are not excited, deployment plans and forecasts can fail (see Tap and Grow? The Case for Contactless Payments).