Competitive Payments

Ronald Mann —  9 December 2009

Most of the discussion related to pricing at the point of sale has emphasized the “cross-subsidy” between those that pay with cash and checks and those that pay with credit cards.  This discussion misses the core of the problem in a market where the use of cash and checks is rapidly declining; the central problem is the differential pricing of different card products.  The reaction of the card networks to their “loss” in the debit-card and American Express litigation was to create two new product lines (Visa Signature and World MasterCard) that have unusually high interchange fees, 1-2% higher than typical Visa and MasterCard products.  The rationale for these products from the network’s perspective is two-fold.  First, the increased interchange revenues compensate for lowered interchange revenues on debit-card transactions.  Second, issuers collect higher interchange revenues and thus would not shift their business out of Visa and MasterCard and toward American Express.

The problem from the merchant’s perspective is that these cards differ in no substantial way from the conventional credit products, except that they cost more.  The same customers that formerly used a typical Visa or MasterCard product now use a high-interchange product.  Although those customers often have multiple cards in their wallet from which to choose, they are likely to choose the high-interchange product because it brings them more rewards.  Merchants that do not believe the products motivate increased spending in their stores have no practical response except to refuse all Visa, or all MasterCard products.  Thus, the networks face no price pressure, because the only competitive pressure they face is to keep issuers from moving to other networks.

If the best way to identify prices is to let the market set them, perhaps the best reform is the simplest: allow merchants to discriminate among the products of the various networks, to surcharge or decline products priced at a level that is unattractive to the individual merchant.  Wal-Mart and Walgreen’s might immediately decline to accept Visa Signature and World MasterCard at their current price.  Their customers, predictably, would make identical purchases but simply pull a different card from their wallet.  Macy’s and Bloomingdale’s probably would continue to accept the high-cost products, worried that customers might spend less or go elsewhere if they can’t use their high-rewards cards.  Visa and MasterCard could judge for themselves whether it would be appropriate to decrease, or increase, the interchange fees for those cards.  The outcome, though, would be price levels determined by the attractiveness of the particular products to particular merchants.

5 responses to Competitive Payments

  1. 

    “But if the prices for the premium cards are so high that retailers are willing to turn away customers at the point of sale that want to use those cards — and some merchants plainly do have that attitude — doesn’t that suggest that the current system is not providing the right type of competitive pressure?”

    I’m confused. Doesn’t that show that there *is* competitive pressure? If no retailers were able to turn away customers, and felt forced to accept high-margin cards no matter what, wouldn’t you use that as evidence of market power on the part of Visa and Mastercard?

  2. 

    You are surely right that it is not a stable or satisfactory regime. But if the prices for the premium cards are so high that retailers are willing to turn away customers at the point of sale that want to use those cards — and some merchants plainly do have that attitude — doesn’t that suggest that the current system is not providing the right type of competitive pressure?

  3. 
    Omri Ben-Shahar 9 December 2009 at 3:38 pm

    Ronald,
    I agree with you. I think there are a few wrinkles that are not as simple to straighten out, and I wonder what your thoughts are. For one, consumers are going to have a hard time knowing which Visas or MasterCards are accepted at which merchant location. This might not be a big deal for those who carry multiple cards, but it might burden others.

    I guess you can say that if this is indeed a problem for consumers, merchants and issuers would be pressured competitively to provide simplicity and uniformity in interchange fees. It is not clear, though, where this would end — what type of arrangements they would institute. But my point is that a regime in which different cards in the same network are accepted in different locations does not seem stable or satisfactory.

  4. 

    Bravo. Well stated. I agree 100%.

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  1. Visa and those Fees, II: For the Activists « Rortybomb - January 7, 2010

    […] goal is to give the retail market the legal power to differentiate between credit cards types. Here’s Ronald Mann on this topic. Debit cards have less fees than credit cards which have less fees than premium credit […]