Mar 13, 2008

Uncovering the hidden value in interchange fees

OK, I know that’s a provocative title, but bear with me.

My last post showed how printing targeted promotions at the bottom of POS receipts costs merchants a few cents per impression versus close to a dollar for traditional direct marketing campaigns. The customer checking out right now hasn’t been here in over a month? Print a special offer to encourage him to come back in the next few days. Try doing that with direct mail. And imagine how much it would cost.

Substantial savings are possible because of hidden value in the payment transaction, or in other words, hidden value within the interchange fees paid by merchants.

Let’s take a hypothetical fast food chain, convenience store chain and supermarket chain, with average transactions of $7, $20 and $30. These retailers are probably paying average interchange fees per transaction of 25¢, 60¢ and 80¢ respectively. Merchants think of the fees as a “hidden tax”, and they compare them with utilities like electricity, water and gas. Banks need to focus much more on the marketing value of their services, and get merchants to see payment as another marketing and advertising channel rather than simply a tax or utility.

But it might be too late for this to help protect interchange. Banks too often see interchange as purely a legal issue. The industry as a whole is not moving fast enough to build new value linked to those fees. It’s possible that interchange will continue getting clobbered all over the world, and cut to a fraction of current rates. In their place, new fees will arise for the marketing features that some of the more nimble banks will add to their merchant services offerings. In other words, the financial value hidden within the payment system would shift from issuers to acquirers. Now that would be revenge for the banks that went against conventional wisdom and kept their acquirer activities over the past decade, wouldn’t it?

1 comment:

pkhazel said...

...when I learned of VISA's ALP initiative and then saw it explained in a recent issue of their acquirer publication, it's pretty clear to me that VISA intends to use the network for marketing and promotional purposes. Linking cardholder account information to real time benefits (related to the transaction) delivered at the point of transaction has the potential to create lots of value for users of VISAnet....although this initiative may also have the potential to backfire, particularly among Level 1 merchants who tend to protect their customer relationships very diligently.

IMHO, if VISA wants to protect/justify interchange, they should deliver a security programme that takes merchants out of the security business and provides appropriate indemnification against card data breaches. If they did that, Level 1 merchants would get on board pretty quickly.