MasterCard recently published a report, “Benefits of Open Payments Systems and the Role of Interchange.” (direct link, background). I interviewed MasterCard’s Shawn Miles, Group Head, Global Public Policy and Regulatory Strategy Counsel.
Aneace: One of the benefits of interchange is that it helps fund innovation, and we have definitely seen in Australia that lower interchange means lower innovation in the card industry. However, much innovation seems to be focused on benefits for card issuers. Since interchange is paid by merchants, what kind of interchange funded innovation focuses on merchant benefits instead?
Shawn: We think that our payments network itself is a huge innovation that benefits merchants every day considering the complexities and costs merchants would have to undertake to run their own card programs. But one very good specific example of an innovation that benefits merchants tremendously is PayPass, the "touch and go" technology that provides merchants who benefit from improved speed of transactions, like fast food restaurants, transit systems, vending machines or taxis. Our Time and Motion study indicated a 52% increase in speed over cash payments. Not only do merchants benefit from the increased speed of people moving through their stores, but research shows people spend more when they use PayPass - and even New York City taxicab drivers are admitting they're getting higher tips when people use PayPass.
Aneace: Given the credit crisis today, and given the loss of revenues that many retailers are now facing, one could imagine two very different scenarios regarding interchange. One would be that merchants will now fight even harder to reduce their costs and cut interchange fees. But another opposite scenario might be that merchants will be more open to paying interchange fees for transactions which they might not have made if cards were not available. Which scenario do you see playing out?
Shawn: Some merchants may only want to focus on cost, rather than benefits. We certainly recognize that, particularly in this environment, everyone wants to lower their costs of doing business. But you're absolutely right that the continued availability of credit is one of the things that is helping drive transactions, even more so in this environment than in general, and we would hope that some merchants will recognize the benefits they're receiving from accepting payment cards. One of the reasons we produced this brochure is to remind people, including merchants, of the enormous benefits that open, four-party payments systems bring to the economy and society.
Aneace: Retailers seem to understand that there are costs involved in offering card payment services, and say that they are willing to cover a certain level of interchange for those costs. However they don’t like the idea of card issuers using their interchange revenues to fund their own loyalty and rewards programs. How do you see this trend evolving, especially given the current financial climate?
Shawn: Merchants are the ultimate beneficiaries of so-called "premium" cards, as there's ample evidence that people who use them spend more, so merchants’ revenues are higher. According to Nilson Report issue #898 from March 2008, as part of a report/article on “Merchant-Funded Rewards Programs”, “the average monthly spending on a credit card with no rewards program is $465. That figure increases to $890 for a rewards card.” So the Nilson data shows that the affluent shoppers who use these cards spend, on average, double what people using standard cards spend. That's a pretty big benefit for the relatively low cost of acceptance.