Wednesday, July 26, 2006

Shouldn't Lower Marketing Costs Reduce Interchange Fees? (

Billions of Wasted Direct Mail Litter Might End

While the credit card associations and their member banks talk up the costs behind electronic payments, we took a closer look.

According to Visa® and MasterCard®, fraud and processing costs are largely responsible for interchange fees. However, with new technologies those costs should be marginalized.

Although technology is more advanced in the United States than abroad, many other countries maintain comparatively fractional interchange rates. Some even have zero fees, such as the Canadian PIN network, even check writing has a zero interchange fee - although the processing and clearing expenses are significant.

A leading justification by the card issuers for high fees also relates to marketing expenses. Visa and MasterCard’s member banks mail out more than 5-billion direct mail solicitations each year. In prior postings, we questioned this strategy. In an attempt to limit their fraud exposure they should also reduce these solicitations to non-credit worthy cardholders and the billions of other wasted direct mail garbage that litters our landfills. This could help remedy the add costs shouldered by retailers and consumers. It also provokes more questions about collusive price-fixing by agreement.

Now they are responding.

According to The Wall Street Journal and other media sources, the ineffective junk mailings will be reduced. Card issuers will begin to use other methods to promote their products, such as through automatic teller machines, onsite at bank branches and on the Internet. Even non-traditional retail and other outlets are being used to solicit new customers.

These added cost savings might be a precursor for preparing the card issuers to finally begin slashing these unjustified interchange fees.

[Source: commentary, with background news from the WSJ]