MasterCard Worldwide – Page 3
Viewpoints on Electronic Payments, Interchange and Regulation of the Payments Industry
Calls For Price Controls
“In a free economy, prices are determined by the interaction of buyers and sellers. The claims that Visa and MasterCard are monopolistic are laughable given the broad array of payment options available to merchants and consumers. Along with cash and checks, merchants can now accept a bewildering array of credit cards, debit cards, and charge cards. Moreover, within the credit card segment there is robust competition between Visa, MasterCard, American Express, Discover, and small players. The fee structures of Visa and MasterCard are plainly designed to maximize the use of these cards, not to extract monopoly prices.
The trial lawyers are locked in on Visa and MasterCard because they see dollar signs. The merchants who are buying into these suits are, in their understandable desire to cut costs and maximize profits, being shortsighted. Crippling Visa and MasterCard through regulation or litigation would decrease consumer choice and buying power and ultimately hurt the merchants who are calling for it. The trial lawyers may be their friends on this fight, but seeking legal and regulatory intervention for market advantage is a precedent that large merchants will likely regret in the future.
No merchant is forced to accept Visa or MasterCard. Their near-ubiquity is not the result of any market abuse, but rather follows from the terrific value proposition they offer both consumers and merchants. The merchants know that accepting credit cards allows them to retain customers and make far more sales than they could otherwise make, and they are willing to pay transaction fees, including interchange, for those benefits.” Boston Globe, “Crying Wolf over Credit Card Fees,” by Phil Kerpen, policy director for the Free Enterprise Fund, November 25, 2005
“What these retailers are really trying to do is shift more of the processing costs to consumers who hold the credit cards. This cost-shifting is exactly what happened in Australia when the government granted merchants’ wishes and set the fees.
When the price controls were pushed through Down Under, Aussie consumers were hit with higher annual fees and fewer reward programs like frequent-flier bonus miles. One study found 30 percent to 40 percent of banks’ lost interchange revenues were simply picked up by cardholders through higher costs to them. And these consumers saw no corresponding decrease in prices they paid for goods, according the newspaper the Australian, though Aussie retailers saved more than $450 million in U.S. dollars.” Washington Times, “Credit Card Ricochet,” by John Berlau, director of the Center for Entrepreneurship at the Competitive Enterprise Institute, September 17, 2006
“More pernicious is the slow decline in competitiveness of the payments system. When this
government took power, Australia boasted one of the best payments systems in the world. Bankcard, a home-grown credit card, rivaled international offerings. The Eftpos direct debit system was world class. Australia was the first market with a mobile payments system in taxis. New technologies, like chip-based stored-value cards, were being tested in Australia first.
Something has gone wrong. Bankcard is dead, Eftpos is dying, Australian institutions have little stomach for transforming innovation in payments and the average cost of transactions in Australia is greater than world's best practice by a factor of 10. For a decade, Hong Kong consumers have been able to use one card – it can stay in your wallet – to board public transport, buy a paper or pay for dozens of other services.” Australian Financial Review, “Time to Revisit Wallis Reforms,” July 2, 2007
“Another bad idea being pushed by some state legislators (in Washington state and elsewhere) is to put price caps on what credit card companies can charge merchants (i.e., price controls). The credit card industry is highly competitive, with four major competitors and many small ones. Merchants can select which credit cards they wish to accept and they can negotiate fees. Those demanding price controls (which include some merchants who would be outraged if anyone suggested controlling the prices they charge) fail to understand that prices are information. Prices motivate future production and allocate scarce resources. As the communist countries showed, ultimately an economy cannot successfully function without market-determined prices. Every experiment with price controls for 2,000 years has failed, often with disastrous consequences because the controls cause goods and services not to be produced in the quantities that the consumers want. Yet politicians the world over continue with the hubris that they know the ‘correct price’ better than the market.” Washington Times, “Dumb and Dangerous,” by Richard W. Rahn, director general of the Center for Global Economic Growth, a project of the FreedomWorks Foundation, April 7, 2006
“Imposing price controls on credit cards may help a few borrowers, but it would raise the cost of having a credit card for everyone else and cut off access to credit for many of the riskiest borrowers. That's no way to be a friend to consumers.” Wall Street Journal, “Credit Where It’s Due,” by Jonathan M. Orszag, senior managing director, Competition Policy Associates (Compass), October 25, 2007
Merchant Benefits
“It's been over five months since owner Margarita Uricoechea decided to stop taking cash. It might seem drastic, she says, but it's made her life a lot easier. She rarely goes to the bank now and doesn't worry about having to make change. Plus, she says, the credit card policy has solved other major problems she faced as a small business owner: how to keep large amounts of cash safe and how to trust employees with her café when she can't be there herself.” National Public Radio “Café Refuses To Accept Cash,” October 11, 2006
“This eight-month-old Bend Municipal Airport restaurant, named after the airfield’s elevation above sea level, eliminated cash payments 1 1/2 months ago as a way to save time and money, said chef and owner Dave Hatfield.
‘I got tired of dealing with theft and paying all the waiters to spend an hour counting all the cash, then I would count it all and then I’d drive it a good 10 miles to the bank,’ Hatfield said. ‘Now, I save a good 45 minutes to an hour per day. At the end of the day, I just push a button and everything goes through and life is good.’” The Bend Bulletin, “Cash? No Thanks, Say Restaurants,” July 24, 2007
“For merchants who choose to use credit-card services, there is a nominal charge called an interchange fee, typically less than 3 percent of a total transaction. Consumers pay for the use of a credit card by monthly interest payments and annual fee charges. These services are voluntary and the credit industry is very competitive, but some national merchant groups and members of Congress want the government to eliminate these fees or set price limits. In a capitalist society where supply and demand sets the market rate, price controls never work.
No one likes paying fees, but why should we expect something as advantageous as credit card service to be free? I don't enjoy paying my phone and Internet bills, either, but they help my business and it would be silly for me to expect them to be free.” Republican-American, “Let Markets Dictate Fees on Credit Cards,” by Richard Destadio, owner of Richie’s Comic Cabana, Waterbury, CT February 21, 2007
Consumer Benefits
“Consumers benefit in an obvious way: They don't have to carry around wads of cash, because the credit card bank essentially holds the funds for them. Retailers benefit too: They don't have to deal with cash transactions, which minimize theft at the cash register. They receive a guaranteed payment from the bank that issues the credit card (i.e., no bounced checks). Most importantly, they lure customers into their stores by accepting a credit card of choice. If the retailers didn't think these benefits exceeded the costs of the interchange fee, they could simply refuse to accept credit cards at the register.” Wall Street Journal “Credit Where it’s Due,” January 12, 2006
“I respect the fact that you were being conservative, and careful about money when you used a personal check. But get that checkbook out of your purse. It takes up space. It’s a dangerous key to your finances, and your entire identity, if your purse is stolen. Using digits instead of paper checks is environmentally responsible. Your debit card will save millions of trees that would otherwise be made into paper checks -- and millions of gallons of gas that would be used to transport those checks from merchant to bank to clearing center and back to your bank.”
The Chicago Sun Times, “Check Your Backward Ways at the Counter and Get with Plastic,” by Terry Savage, January 22, 2007
“Two-thirds of consumers state that they know that there are fees charged to merchants for each card transaction, and an overwhelming 84% believe it affects the prices that merchants charge for goods and services. But few consumers are willing to change their choice of payment method at large chain retailers because of this issue. Only 23% would use ‘the cheapest method for the merchant’ at a large chain retailer. Large electronics retailers, department stores, and even grocery store chains (often the most vocal) will not succeed in eliciting the sympathy and packing of consumers in their fight against interchange.” Bruce Cundiff, Senior Analyst, Javelin Strategy & Research, Payments Interchange: The Tenuous Balance: Merchant, Issuer and Network Uncertainty Calls for Policy Changes and the Elimination of Rhetoric, April 2007
“Consumers do not view merchants as ‘partners in the fight against interchange.’ Despite merchants’ attempts to foster common goals by positioning interchange as adversely affecting consumers, those same consumers do not trust merchants to pass on any reduction in interchange by lowering their prices.” Bruce Cundiff, Senior Analyst, Javelin Strategy & Research, Payments Interchange: The Tenuous Balance: Merchant, Issuer and Network Uncertainty Calls for Policy Changes and the Elimination of Rhetoric, April 2007
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