Jon’s Network

8 responses so far ↓

• 1 Hunter // Apr 10, 2007 at 11:39 am

  I just read the Economist article as well and it’s about time that a means to avoid the insanely high interchange fees was made available.

  I think you’re right about consumers reluctance to give up their rewards cards. However, there may be a breaking point since it is an upward cycle of increasing rewards and higher interchange fees to fund the rewards programs. Maybe we will reach a point when the increased cost of goods due to interchange fees isn’t worth it. In the mean time, hopefully the recent action in Congress will make more people aware of this issue and maybe even scare Visa and MasterCard into increased disclosure and reigning in these fees.

  Here is another interesting article on interchange fees. It is unreal that the merchant in the article paid 5% of his Easter weekend credit card sales to cover interchange costs. Aside from not liking the increased cost, I sympathize with merchants and am much more aware about using cash when possible than I used to be.

  http://www.tennessean.com/apps/pbcs.dll/article?AID=/20070408/BUSINESS01/704080362/1436/BUSINESS

• 2 Jon Robinson // Apr 10, 2007 at 12:00 pm

  I actually don’t think interchange fees are “too high”. The credit card companies are free to charge whatever they want - it is their network. The merchants gladly pay, because they get sales they otherwise wouldn’t get and because the customers want the convenience. If they can lower costs and get the same benefits, they will. GratisCard may offer that option. It may not.

  I think companies like GratisCard are attacking these interchange networks in the same way VOIP companies are attacking traditional phone companies. They use the Internet for free, thus providing the same service for less. I think this is great because it increases competition, which will end up giving everybody a better product, regardless of which they choose. Right now, it looks obvious that a retailer would want to sign up for GratisCard, but a consumer might not see the benefit the way they have the offer set up right now. Even the privacy features aren’t that big of deal, since they aren’t liable for any fraudulent charges anyway. Consumers won’t use it unless they feel like they are getting paid. (IMHO of course)

  Visa et al could easily squash GratisCard on the privacy front by changing the way personal information is handled during transactions.

• 3 Hunter // Apr 11, 2007 at 11:21 am

  Jon, thanks for the response. I wouldn’t say that merchants “gladly pay.” Yes, they can generate increased business by accepting plastic, but the fees are increasing yearly as the cost of and time needed to process transactions have been drastically reduced. I read, from research on http://www.unfaircreditcardfees.com, that only 13% of the interchange fee covers the actual processing cost with the rest funding rewards programs, marketing costs and profit. The mom and pop shops can’t don’t have an leverage and clearly the big boxes like Wal-Mart are trying to avoid high interchange fees by getting into the banking business. Also, given that Visa and MasterCard have around an 80% market share, merchants have little choice but to accept the terms of the merchant agreements.

  It seems to be a vicious cycle, as we are seeing with Visa introducing their news high end credit cards, where the credit card companies charge higher interchange fees to attract issuing banks and fund rewards programs with greater benefits.

  I will be interested to see the long-term effects of services like GratisCard and Paypal, also to see if in the near future the threat of Congressional action will prompt changes.

• 4 Jon Robinson // Apr 11, 2007 at 9:06 pm

  Hi Hunter,

  There is nothing wrong with credit card companies making a profit. That is why they are in business. They have a network and they can charge whatever they want to use it. No one is forcing their customers to pay them. Private enterprise can handle the “problem” of high interchange fees by inventing solutions that cost less. That is exactly what Paypal, GratisCard, et al, are trying to do. There are even other options like Goldmoney.

  Political force, such as Congressional threats, not only won’t work, they are just plain unethical, because they disregard basic property rights.

  Merchants may not feel they are getting as much value as they want, but they are getting value nonetheless, otherwise they could cancel their account and accept only cash or switch to another service. I know of plenty of vendors that only accept cash. Costco for years never accepted credit cards until they struck a deal with Amex.

  I believe the best way to lower prices is to invent a more efficient way of performing the service or producing the product. That’s why I’m interested in GratisCard, Paypal, etc. Using political force to keep prices “fair” has already been proven by history and economics to create shortages or to shift the costs elsewhere.

• 5 Hunter // Apr 12, 2007 at 9:56 am

  Jon, I completely agree with you that there is nothing wrong with credit card companies making a profit for the services they provide and that vendors are able to increase their business by accepting plastic. Also, I usually am completely supportive of market based solutions, such as increased competition from services like GratisCard, Paypal, etc. to solve problems such as this.

  However, as I mentioned there seems to be some unique circumstances in this case, particularly market share, that at least warrants some attention to interchange fees. Additionally, there seems to be a disclosure issue, with Visa only releasing their rates for all cards/types of businesses, etc. late last year, likely due to increased attention of the issue. I’m sure the credit card companies are also feeling the heat from the several pending lawsuits against them regarding interchange fees.

  While I’m not a small business owner, I can sympathize with my friends who are. Given that the average profit margin in retail is about 2% so the fees they pay (interchange, “merchant discount” add up quickly. I’m noticing fewer stores that only accept cash and these are long established food businesses or unique stories where most of the customers knows to bring cash. I’m sure it is more difficult with each passing year to survive without accepting plastic.

  I hope this issue can be resolved through increased competition.

• 6 Zampetakis Anthony // Apr 13, 2007 at 3:54 am

  I am always fond of innovative thinking. Using free internet to implement new products and services is amazing. GratisCard offering anonimity, security and lower interchange fees, will meet customers’ needs for privacy, safe and low costs transactions. I’m interesting in learning Visa and Mastercard views on the issue.

• 7 Greg Patrick // Apr 15, 2007 at 5:11 am

  I found out it not the merchants nor Mastercard, Visa, Star, Nyce, Maestro, Interlink that set the rates it is actual the merchant processor / provider that does. Merchants are free to shop around for other methods or steer customers to pay with another method. Some banks and a few merchants charge a fee when using a debit card as a pin purchase.

• 8 Jon Robinson // Apr 16, 2007 at 9:11 pm

  @Greg: That is a good point. Something I knew from experience of setting up a merchant account of my own, but didn’t consider when discussing this. Thanks.

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