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Consumer Credit Card Fees Riddle Costs Money Carriers

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The Economist magazine recently published a somewhat provocative article titled “Can the Visa-Mastercard duopoly be broken?– which began by pointing out how expensive the current retail payments infrastructure is to operate. The focus was on the cost of the cards. Merchants are unhappy with the fact that over the past decade the fees they pay to accept cards have doubled — to $138 billion in 2021, according to the Nilson report — making it, according to the National Retail Federation (NRF), the second highest cost of doing business after the cost of labor. Overall costs, according to The Economist, are such that the current payment system adds 1.4% to retail prices.

A “Durbin 2” bill is proposed in the United States to limit these costs. American banks understandably lobby vigorously against any form of price fixing, arguing that an interchange fee cap is simply a forced transfer of money from banks to retailers.

(The global evidence on these topics largely supports this view, by the way.)

The banks also argue that such a cap “decimate card rewards programslike airline miles, valued by American families.

(The global evidence on these topics largely supports this too, by the way.)

Is this a bad result? The dynamics of the credit card rewards world are somewhat perverse. Matt Stoller points out (in BIG, his Monopoly Power Politics newsletter) that credit card rewards programs bring in some $20 billion a year in the United States, and most of that goes to high-income households. Essentially, the poorest households pay $21 per year to fund these schemes and the wealthiest households earn $750 per year. This basically means that credit card issuers make a lot of money and pay back enough to cardholders to create switching costs.

Here in the UK we have a similar problem, although the charges are lower. That’s why I use my premium card to buy everything from coffee cups to furniture, which means merchants pay the maximum fees and I earn the maximum rewards.

As I pointed out at the time, the inevitable consequence of Britain preventing retailers from overcharging cards has been to raise prices and transfer money from the less well off to the better off.

The fact is that there is a fundamental element conundrum in the surtax debate that is, consumers want the frequent flyer points and miles that come with credit card use, but they don’t want to be overcharged for paying for it. Without a surcharge, people who pay with cash or debit card subsidize my frequent flyer miles and my gift certificates.

There are ways for merchants to circumvent the link between cards and rewards and offer their own rewards directly to consumers rather than paying for banks to offer rewards to customers. Indeed, the article on the duopoly quotes the correspondent encouraged by an online merchant to use an application linked to his bank account (via Plaid) to pay directly via the banking network rather than using a card.

You can see the appeal from a merchant perspective, so we can expect these programs to grow. I’ve said more than once that these bank account payment alternatives will grow through the use of retailer apps rather than as card replacements and somehow I’m surprised that more retailers haven’t already taken this route.

Practical steps

Back to the main issue of payment fees. There are, and always have been, only two ways to reduce costs: competition or regulation. When it comes to competition, the landscape is certainly changing. Traders currently have options like “buy now-pay later” (BNPL), and of course they could still use cryptocurrencies now or perhaps central bank digital currencies (CBDC) at the moment. coming. It seems to me that serious competition will come from account-to-account (A2A) systems that transfer money between consumers and retailers through the banking system. Therefore, I was interested to see The Clearing House launch a “pay by bank account” system to provide an alternative to cards for bill payment (and other recurring payment use cases) where the protections inherent (and the costs of) card payments are not justified.

In the United Kingdom, the payment system regulator (PSR
PSR
) has included in its plans for 2022/23 removing barriers to the adoption of A2A retail payments, which it says can provide a “credible” alternative to card schemes. PSR is working with the Financial Conduct Authority (FCA), Competition and Markets Authority (CMA) and Treasury on the future of open banking regulation, which will play a major role in the adoption of A2A payments, and is putting in place a strategic working group on A2A with them. They identified four key issues that will need to be addressed to accelerate the use of A2A in retail. These are:

  • Globally functional capacity: The PSR speaks to the need to meet the particular needs of users of retail purchase transactions, such as the ability of retailers to trigger payment with the consent of the customer when the customer is not present. My view is that interoperable request-to-pay (R2P) services will support “customer is present” transactions, whether in the contactless or online retail environment, and variable recurring payment interoperable (VRP) services will support the “customer present” situations necessary to replace direct debits.
  • Practice litigation process: Retail transactions carry new risks, such as unsatisfactory goods delivered after payment, or the retailer not acting in good faith. Consumers are used to and appreciate the protections offered by card products. So, as discussed in more detail below, the industry needs a strategy to provide appropriate levels of protection for A2A transfer.
  • Widespread to access and appropriate reliability: Retailers and consumers should be able to use their preferred payment method whenever they want. We want to make sure that the system works properly for the end-to-end journey of a retail transaction and that customers have no issues when making their purchase. We also want to explore what the seller needs to be sure they will get paid and ensure there is enough capacity to meet potential usage in the future. There are many ways to get access and reliability, of course, in my general feeling, building a parallel device-to-instant device (as opposed to account-to-account) digital currency infrastructure is the best solution .
  • A durable funding model: For A2A payments to work in retail, there must be a fair business and pricing model that ensures that all parties receive sufficient compensation for the services they provide and can continue to invest in new products and innovate more. I think it’s generally recognized that models are less and less likely to be based on transaction fees.

As part of the PSR plans for 2022/23 it therefore intends to examine these questions and see if the commercial incentives for banks, intermediaries and merchants are there to support greater use of A2A payments and to see what it can do to increase the adoption and promote card competition. I’m sure regulators in other countries will be looking in the same direction.

The shift to A2A won’t happen overnight, of course, but for many payment transactions that will drive volume in the app-driven, smartphone-centric, and ever-present economy, merchants are striving to reducing costs will begin to impact the payment mix we know today. Indeed, even without a chargeback mechanism, people like me will happily give to Amazon
AMZN
access their bank account in exchange for three free Prime months or give Tesco access to their bank account in exchange for double club card points.

Would I give access to Air Ruritania? No, of course not, I would use my credit cards for this, as I would for all potentially risky transactions, and would gladly pay the extra.