Thursday, August 23, 2007

An Extraodinarily Fictional Read: MasterCard® Explains the Value of Interchange Fees (Commentary:

According to a posting on the MasterCard® Newsroom pages, the second largest credit card association writes (what we assert is) extraordinary fiction.

Click here to read it in their own words.

This is MasterCard's attempt to justify the annual $40 billion fee that merchants and consumers are forced to pay; many are unaware of this hidden tax.

While MasterCard explains that "a number of merchants and merchant trade groups have filed several lawsuits alleging that the U.S. interchange fees that MasterCard establishes violate antitrust laws, and that the cost of interchange is too high," the litigation is a class-action which represents all merchants - not just a few.

The litigation was brought on behalf of us (30 Minute Photos Etc.), as lead plaintiff, and other businesses and trade associations across the country, not by lawyers. Rather than address the damages, the card association's published points accuses lawyers for seeking these cases to enrich themselves, rather than discussing the billions-of-dollars that benefit the member banks.

In the case of (a division of 30 Minute Photos Etc.) we agree with MasterCard that "every business establishes a price for the goods and services it provides." in our case, we created an entirely new business model around digitally preserving generations of analog pictures; we designed a technology and operation that also provides ultra low fees. We are not a cartel that artificially fixes prices, in fact, we regularly share our story with the entire photo imaging industry and regularly speak at trade shows like the Photo Marketing Association and even at last January's (CES) Consumer Electronics Show convention - our rates and how it case about are a secret to nobody.

In our opinion, the biggest misuse of words is MasterCard's explanation that the interchange fee benefits to merchants is that it is a "small fee." Forty-billion dollars each year is anything but a small fee. MasterCard does not fully address the history of these fees and fails to explain that it was created to be cost-based - to cover the manual credit card imprint costs and weighty processing charges incurred when merchants had to mail the paper receipts to have it processed. Today, it is mostly electronic, lightening-fast; and even faster than our super-speedy photo scanning business.

They even use the word "incredible" ["Accepting payment cards provides merchants with an incredible value at a fair price.]" They are right, it is incredible, as in so implausible as to elicit disbelief.

The reality is that with a nearly 80% market dominance, MasterCard and Visa® (which until recently were both owned and controlled [Visa is preparing to launch an IPO] by its member banks) are a monopoly. They control the market. Merchants, like us, are unable to choose not to accept their debit and credit cards - we would be out of business - especially companies like us with a dominant ecommerce revenue stream.

As for interchange fees, it certainly does "help foster... security" but not so much for consumers, as explained by MasterCard, but for the member banks, which look forward to this extraordinarily large cash-cow and unbridled revenue stream; it's a tax few know about, but generates non-stop riches for MasterCard, Visa and its member banks. If they were so concerned about fraud costs, they would cease the issuance of billions of direct mail solicitations and providing credit cards to risky consumers. Today's technology is also helping to lower other types of fraud costs, yet interchange fee adjustments do not reflect the cost savings either.

The fees do encourage "banks to innovate and develop new payment options," but in some cases, to the detriment of cardholders and merchants. Look at the one-hundred plus separate merchant interchange fees which create new revenue streams every time a new innovative scheme is hatched to plunder more money from retailers and cardholders.

When reading the MasterCard explanations, they even discuss how the payment industry is "competitive." As we see it, the only contest they host is one-way, and the competition is to seek out new ways to increase interchange fees. With an 80% market share, competition is a fleeting dream. Why are rates about 1.7% for an average transaction in the U.S., but only .7% in the U.K, .55% in Australia, and 0.0% for PIN-based cards in Canada?

And, according to MasterCard, they do "recognize that merchants do want lower costs for all aspects of their business." It is encouraging that they recognize this fact, but if they strive to help lower interchange costs, why then are fees regularly rising?

Words and actions are very different when it comes to interchange issues and our Credit Card Interchange Report boasts 720 postings since February, 2005. provides our prospective as a long-time retail and ecommerce business.