Comments on: You can’t get away from interchange

By: Dave Birch

Dave Birch — Sat, 31 Jan 2009 09:30:18 +0000

“‘And note that interchange doesn’t have to reduce much to make the product marginal’. This statement is absolutely FALSE.”
I apologise for being unclear: this statement refers to the prepaid card product under discussion, not card products in general.
Credit and debit do not become marginal under reduced interchange because a bigger proportion of their overall revenue comes from other sources (not interchange). But they do become less profitable, and the evidence from Australia appears to be that retailers gain most.

By: Stephen

Stephen — Tue, 27 Jan 2009 00:55:19 +0000

“And note that interchange doesn’t have to reduce much to make the product marginal”. This statement is absolutely FALSE. Don’t believe this scare mongering.
In Australia, Visa and MasterCard’s weighted average interchange fee for credit products is regulated to be no greater than 0.50%. For debit products, weighted average interchange can be no greater than 12c per transaction.
The most notable change in the Australian credit card market post regulation is a noticeable reduction in the generosity of credit card rewards program.
The number of credit card accounts in Australia continues to reach new highs, as it did in the most recent data release for Nov 2008. Credit card transactions continue to grow with vigour, although current economic events have moderated growth in recent months.
http://www.rba.gov.au/Statistics/Bulletin/C01hist.xls
At first the argument for interchange was that interchange should be paid by merchants to encourage the formation of card networks. Now merchants, it is argued, should continue to pay large interchange fees to create a large slush fund for the banks to ‘innovate’. Well let’s see some innovation then. For the record, the card payments system is working just fine as it is for retailers.
In Australia there has been a rash of product innovation since our card networks, and their interchange fees, were first regulated in 2003. In particular, we have seen the introduction of low interest rate cards targeted at revolvers, EMV is now well established, and contactless payments are starting to emerge. As for systemic or network innovation, I don’t see how this will happen just by putting interchange fees in the coffers of issuers.
The death by lack of innovation story is the latest argument being trotted out around the world to scare regulators and competition authorities. And it is a myth. It is the sequel to the ‘death spiral’, another myth created to serve the same purpose. The death spiral argument (that reductions in interchange would cause a death spiral in card networks – Google it, it’s included in submissions to the Reserve Bank of Australia) failed once it became clear that significant cuts in interchange, such as in Australia, did not harm the health of credit card networks.

By: Jeremy Light

Jeremy Light — Mon, 26 Jan 2009 19:46:44 +0000

It is worth noting that the genesis of interchange in the 60s – 80/90s period was to incentivise the issuance of cards. While great for banks it was also good for merchants as the payment mechanism helped facilitate, hence boost, sales at relatively low cost while volumes were low. However, with cards at saturation, this need for an issuance incentive has gone, while the cost to merchants is now high, hence the heated interchange debate. But the fact that interchange has led to mass adoption of cards, a huge benefit to society and commerce, indicates that it has had a key role to play in incentivising new payment innovations. Therefore, whatever the rights or wrongs for interchange in mass products such as cards, I agree that its role in driving adoption of new innovation cannot be ignored.

By: Jim Wells

Jim Wells — Sun, 25 Jan 2009 19:22:28 +0000

The problem with interchange is that it no longer bears any relationship to the costs for which it is supposed to represent. It is far in excess of the cost of transactions, and is an obvious profit centers for large networ operators which squeeze merchants and bedevil smaller issuers.

By: Ornela

Ornela — Sat, 24 Jan 2009 23:07:14 +0000

I think this approach is wrong. Innovation occurs when margins are lower and not higher. The more difficult an industry finds to continue its current path is where innovation flourish. Most (if not all) payroll/prepaid cards today are Mastercard/Visa based card, that’s not innovation, that’s more of the same. If interchange is high, no efficiency is needed, is enough to pay for all, including insecurity and inefficiency.

By: Alex

Alex — Sat, 24 Jan 2009 13:26:07 +0000

The reduction of interchange will lead to the gap where new businesses will be able to emerge. The present card industry has proven that is will do everything to kill any outside innovation (let’s f.i. recall the iBill story) and is not going to innovate by itself (multiple new technologies acquired shelved and killed). The degree of monopolistic behavior in the payments industry is unprecedented, it is far beyond everything known in the past, incuding (but not limited to…hehe) Standard Oil, AT&T, Microsoft, you name it. Kill the beast of monopoly!