Forget Swipe Fees, Credit Card Issuers Are Losing the Payments War

While the debate rages about whether the interchange fee battle is over, the broader war is being lost. The fundamental challenge for issuers and networks is the retail market will only accept reasonable fees in the long run. That's how markets work. Thanks to competition, merchants are finding ways to bypass the ubiquitous card networks. If the networks don't voluntarily implement more reasonable pricing, they will soon have nothing left to fight about.

First, let's be clear, the card networks do provide a huge and amazing value to merchants. Payments from any bank can be easily accepted in virtually any store or website with one set of equipment. The cost of processing payments is often less than handling cash or checks. Additionally, consumers spend more on cards than they would with cash. Clearly, this is a win-win. Or, at least, it was for many years.

The evolving problem, which has been widely documented, is that merchants only want to pay for the value they receive (plus maybe a little more to avoid the inconvenience of changing their practices). A 2% or 2.5% premium is reasonable. Sadly, many merchants are paying much more. Accept a Visa Signature business rewards card and the merchant will be paying a significant premium. Add to that a flurry of unintelligible fees and surcharges and the actual merchant bill can easily average 6%. Merchants are now open to any affordable alternatives and U.S. entrepreneurs are good at providing them.

While the associations battle over the details of the proposed plan, many merchants are actively looking for alternatives. We've seen stories recently about Home Depot and 15 other retailers partnering with PayPal and Lowe's working with Google Wallet. Every website with any scale accepts BillMeLater. The one thing forcing merchants to accept cards is that consumers expect or demand it. One important lesson of the past few years is that consumer behavior can change in a heartbeat. To the glee of merchants, the number of less expensive alternatives to credit cards is swelling.

Mr. Tassey and others are correct in saying merchants don't want to charge a "convenience fee" for credit card users. But many local merchants have already begun to, either setting a minimum amount to use a credit card or charging a fee for purchases under $10. To everyone's surprise, most customers didn't freak out. In fact, the amount of news coverage concerning the recent Visa/MasterCard settlement has prepared consumers for the change. And, with many consumers already considering debit as an alternative, it is surprisingly easy to steer consumers from credit cards.

Ultimately, this entire debate boils down to a simple reality. Issuers and networks can fight to protect their high fees and kill the credit card in the process or they can lower fees and save the industry. It is hard for participants in any market to work together for the mutual good, but in this case, the networks are in a unique position. They can proactively begin reducing the number of categories charged to merchants, starting with Signature and rewards cards. Issuers can continue to offer rewards cards with an annual fee to replace the differentiated income. In time, merchant fees will be in line with the value retailers receive and issuers will compete for consumers with more transparent card options. If not, they will be leaving the market wide open for alternative payment providers.

Eric Lindeen is marketing director for Zoot Enterprises Inc., a provider of credit decisioning and loan origination solutions for large financial institutions.