Sunday, July 09, 2006

Shouldn't Smart Cards Remedy Soaring Interchange Fees? (

Technology should equate to more reliable service and lower costs. Right?

A recent commentary on "Moore's Law" explained how this functions in seemingly all industries but banking. For the two global payment card leaders - which share nearly 85 percent of the market and are partly co-owned by the same banks - Moore's Law appears to falter.

The credit card companies list several factors to establish their default interchange rates. Among them are:

1) "Costs that the issuing banks incur"
2) "[C]redit losses"
3) "[F]aud losses"
4) "[F]raud prevention costs"
5) "[P]rocessing costs"

That said, look at technology and how it is helping to mitigate these factors. According to the Los Angeles Times (July 9), foreign countries have mandated that card issuers adopt "smart cards" which have computer chips and personal identification numbers (PIN) built into the cards, rather than the more antiquated magnetic strips, signiture-based cards.

Cardholders enter the more secure [lower risk, lower cost] PIN number, instead of scribbling their name on a receipt. These new rules were enacted by foreign governments to "curtail fraud."

According to the Los Angeles Times, "the chip and PIN cards have been successful in reducing bogus transactions. The same "Travel Insider" article writen by James Gilden reported that credit card fraud dropped in Britain alone by $117 million last year - even though the smart card technology was not fully introduced.

So, the question is if interchange rates are indeed cost-based, then why are merchants and consumers faced with a reported $30 billion annual hidden tax? While technology clearly is helping to reduce processing costs, if it is not because of collusive price-fixing, then why are rates still rising?

Merchants and trade groups are suing Visa®, MasterCard® and their leading member banks because of alleged antitrust law violations. Yes, there is great value derived from accepting payment cards, but that is not the issue. To distract from the issue, MasterCard®, for instance, attempts to deflect the concerns of millions of retailers by publishing statements on their "Company Info"
website page insisting that "these lawsuits are being driven by class action lawyers whose primary motive is to extract enormous fees for themselves."

All they have to do is ask their customers. For instance, earlier today we received the below email from the owner of a restaurant in Jacksonville, Texas. While it was edited for clarity, you can see that this multi-billion dollar issue is not about lawyers, but rather real people with real issues.

This morning, I discovered your blog. What's going on in "middle America?" The fleecing of small merchants by credit card companies and their interchange fees is ghastly. Because we have no way to differenciate between debit and credit cards though our processing terminal, our fees have almost doubled in the past 3 years. Over half of our sales every day are credit card/debit sales. It was killing us. We're in a small market and are fortunate that many of our guests have been very understanding. Your website was a breath of fresh air. I felt pretty much all alone in my disgust of the interchange fees and monopoly of the credit card companies until this morning.