Blog: Consumer Credit Cards Charges Conundrum Costs Cash Carriers – Forbes

The Economist magazine recently ran an article — somewhat provocatively titled “Can the Visa-Mastercard duopoly be broken” — that began by pointing out just how much the current retail payments infrastructure costs to use. The focus was on the cost of cards. Merchants are not happy about the fact that over the last decade the fees that they pay to accept cards have doubled — to $138 billion in 2021, according to the Nilson Report — which makes them, according the National Retail Federation (NRF), the second highest operating cost after the cost of labour. The overall costs, according to The Economist, are such that the current payment system adds 1.4% to retail prices.

A “Durbin 2” bill is being proposed in the USA to limit these fees. American banks are naturally lobbying strongly against any kind of price-fixing, arguing that an interchange fee cap is simply a forced transfer of cash from banks to retailers.

(The global evidence on such topics broadly supports this view, by the way.)

The banks also argue that any such cap would “decimate card rewards programs, such as airline miles, valued by American families.”

(The global evidence on such topics broadly supports this too, by the way.)

Is that a bad outcome though? The dynamics of the credit card rewards world are somewhat perverse. Matt Stoller points out (in BIG, his newsletter on the politics of monopoly power) that credit card reward schemes deliver some $20 billion per annum in America and most of this goes to high-income households. In essence the poorest households pay $21 each year to fund these schemes and richest households earn $750 every year. What this means in essence is that credit card issuers make a lot of money and pass enough of it back to cardholders to create switching costs.

Here in the UK we have a similar problem, although fees are lower. This is why I use my premium card to buy everything from cups of coffee to furniture, meaning the merchants pay the maximum charges and I earn the maximum rewards.

As I pointed out at the time, the inevitable consequence of Britain stopping retailers from surcharging for cards was to raise prices and transfer money from the less well-off to the better off.

The fact is that there is a fundamental conundrum in the surcharge debate which is that consumers want the points and frequent flier miles that come with credit card use, but they don’t want to be surcharged to pay for it. Without surcharges, the people who pay with cash or debit cards are subsidising my frequent flier miles and gift vouchers.

There are ways for merchants to bypass the cards and rewards nexus and offer their own rewards directly to the consumers rather than paying for banks to provide rewards to the customers. Indeed, the duopoly article quotes the correspondent being incentivised by an online retailer to use an app linked to her bank account (via Plaid) to pay directly through the banking network rather than use a card.

You can see the attraction from the merchant perspective so one might expect these schemes to grow. I said more than once that these bank account payment alternatives will grow through the use of retailers apps rather than as card replacements and in a way I am surprised that more retailers haven’t already gone down this route.

Frequent fliers.

© Helen Holmes (2022).

Practical Steps

Back the main issue of payment costs. There are, and have always been, only two ways to get costs down: competition or regulation. When it comes to competition, the landscape is certainly changing. Merchants have options such as “buy-now-pay-later” (BNPL) available to them right now, and of course they could always use cryptocurrencies now or perhaps central bank digital currencies (CBDCs) in the future. It seems to me that the serious competition is going to be from account-to-account (A2A) schemes that transfer money between consumers and retailers through the banking system. Hence I was interested to see that The Clearing House is launching a “pay-by-bank-account” scheme to provide an alternative to cards for bill payments (and other recurring payment use cases) where the protections inherent in (and costs of) card payments are not justified.

In the UK the Payment System Regulator (PSR
PSR
) has included in its plans for 2022/23 the removal of barriers to to the uptake of A2A retail payments, which it says can provide a “credible” alternative to card schemes. The PSR is working with the Financial Conduct Authority (FCA), the Competition and Markets Authority (CMA) and the Treasury on the future of open banking regulation, which will play a major role in A2A payments uptake, and is setting up a strategic working group on A2A with them. They have identified four key issues that will need to be addressed to accelerate A2A use in retail. These are:

  • Overall functional capability: The PSR talk about the need to address the particular user needs of retail purchase transactions such as retailers’ ability to trigger the payment with the customer’s consent when the customer is not present. My view is that interoperable request-to-pay (R2P) services will take care of the “customer is present” transactions, whether in the contactless tap-and-pay retail environment or online, and interoperable variable-recurring-payment (VRP) services will take care of the “customer was present” situations needed to replace direct debits.
  • Practical dispute processes: Retail transactions bring new risks, such as unsatisfactory goods being delivered after the payment, or the retailer not acting in good faith. Consumers are used to, and like, the protections afforded by card products so, as we will discuss in more detail below, the industry needs a strategy to deliver appropriate levels of protection for A2A transfer.
  • Widespread access and appropriate reliability: Retailers and consumers must be able use their preferred payment method when they want to. We want to ensure that the system works properly for the end-to-end journey for a retail transaction, and that customers don’t have any problems when they make their purchase. We also want to explore what the seller needs to feel assured that they will be paid, and ensure that there is sufficient capacity to match the potential uptake in the future. There are several ways to achieve access and reliability, of course, by my general feeling is that building a parallel digital currency infrastructure of for instant device-to-device to (as apposed to account-to-account) is the best solution.
  • A sustainable funding model: For A2A payments to work in retail, there must be fair commercial and pricing model that ensures all parties receive sufficient compensation for the services they provide, and can continue to invest in new products and further innovation. I think it is generally recognised that the models are increasingly unlikely to be based on transaction fees.

As part of the PSR’s plans for 2022/23 it therefore intends to look at these issues and see whether the commercial incentives for banks, intermediaries and merchants are there to support greater use of A2A payments and to see what it can do to increase uptake and promote competition with cards. I am sure that regulators in other countries will look in similar directions.

The change to A2A will not happen overnight, of course, but for many of the payment transactions that will generate volumes in the app-driven, smartphone-centric, always-on economy the merchants drive to reduce costs will begin to have an impact on the payments mix we are familiar with today. This is because even with no chargeback mechanism, people like me will happily give Amazon
AMZN
access to their bank account in return for three months’ free Prime or give Tesco access to their bank account in return for double club card points.

Would I give Air Ruritania access? No, of course not, I’d use my credit cards for that, as I would for all potentially risk transactions, and I’d happily pay the surcharge.

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