May 15, 2008

“What have you done for me lately?” (Part 2)

(Part 1 is here)

Last week the Boston Globe ran an op-ed piece titled “Leave the ‘plastic’ alone”, essentially saying that merchants should stop complaining about the cost of interchange because payment systems today are so much better than they were 40 years ago. This is a really poor way to protect interchange.

The old days were indeed a big hassle for merchants:

“First, the customer's account number had to be checked against the latest bulletin of stolen-card numbers mailed by the credit-card companies. For purchases above a certain amount, the company had to be called for authorization. If the charge was authorized, a confirmation number was provided, which had to be recorded; the card was then run through the manual imprinter (ka-CHUNK), and the charge slip filled out and presented for the customer's signature. Finally the slip's three copies had to be separated, with one carefully saved for eventual deposit in the bank.”

A Boston Globe reader added these comments to the article:

“Imagine 1960. A hypothetical meeting of owners and CEOs representing millions of businesses is held. A payment option is announced that is faster, improves productivity, and enables virtually all store shoppers to become buyers - and to buy more and more often - with no merchant credit risk. Gasps are heard when the audience is told that 1 billion consumers worldwide could also make a purchase by mail or telephone. The cost: just a 2 percent discount to the face value of any sale. No reasonable mind could doubt that all in attendance at that hypothetical gathering would have jumped at this prospect, and would have seen the cost for acceptance as a bargain.”

The payments industry is definitely much better today, but so are lots of other information based industries, and their costs have all gone down in relation to volume, speed, capacity, etc. Taking this line of reasoning, going back in time a whopping 40 years, can only backfire on the payments industry. The hassles described in the op-ed piece were solved a quarter century ago when electronic payment terminals became widely available. That was the big jump, the big improvement, the WOW! that got lots of merchants excited about accepting cards. Since then, merchants spend much more on payment and have clearly not seen any real improvements substantial enough to increase the value of card acceptance. Otherwise, the Boston Globe article would be focusing on those more recent improvements and the more recent problems that have been addressed.

The op-ed piece concludes with this:

“But Visa and MasterCard are hardly monopolies, and merchants are not without other options. No one is forced to accept Visa and MasterCard; retailers are free to take only American Express or Discover, which operate on a different model and don't charge interchange fees. Online vendors have even more choices, such as PayPal or Google Checkout. And, of course, there are the old standbys: cash and checks.”

Right. So it’s like, if you don’t like my fees, stop accepting my cards. All or nothing. Take it or leave it. (The comment on American Express and Discover is revealing too - both companies do indeed charge merchants a fee for each transaction, which, from any merchant's perspective, are completely identical to interchange fees).

This is not helpful. The payments industry needs more positive and constructive people who are customer (i.e. merchant) focused and who can promote new value creation instead of all this stuff.

We certainly don’t need regulators setting interchange rates like they did in Australia, but with these arguments we’re just showing them that the industry is happy enough offering essentially the same value as a quarter century ago, for much more money.

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