ENDPOINT Conyers makes the
bald-faced claim
that his price-
control bill would
enhance compe-
tition. It would
do precisely the
opposite.
Enter the
Pricing Mandarins
In the name of competition, Congress is proposing to control the way card accep-
tance fees are set. The damage to a market that’s already the most competitive on
the planet would be severe, says Eric Grover.
C
ongress has the card-payments industry card associations and some banks over inter-
in its crosshairs and is on the brink of change. Now they’re lobbying Congress for
converting it wholesale into a regu- relief, and believe the climate in Washington to
lated public utility. House Judiciary Committee be propitious.
Eric Grover is a
Chairman John Conyers, D-Mich., proposes
Asymmetric Pricing principal at Intrepid
the Orwellian-sounding “Credit Card Fair Ventures, Menlo
Fee Act of 2008.” Meanwhile, Sen. Richard Price-control advocates cite regulation overseas Park, Calif. Reach
Durbin, D-Ill., is sponsoring a companion bill to support their case. him at eric.grover@
in the Senate. Australia’s central bank reduced interchange intrepidventures.com.
Conyers makes the bald-faced claim that his fees and permitted surcharging. The result?
price-control bill would enhance competition. It Banks hiked what had been low cardholder fees
would do precisely the opposite. and slashed rewards, while merchants tacked on
Three “electronic payment systems judges” charges often exceeding their card-acceptance
would be appointed. These pricing czars would costs. Not surprisingly, credit card transaction
divine what MasterCard and Visa merchant growth slowed.
card-acceptance fees would be in a “hypotheti- Nonetheless, Australia’s central bankers are
cal perfectly competitive market.” In 2010 their eminently pleased with themselves, contend-
determination would become a uniform price ing their intervention improved price signaling
cap for all merchants regardless of size or risk. and payments efficiency. They do allow, how-
Retailers could continue to negotiate singly or ever, that they prefer a market solution, hinting
collectively for better terms, which would be they might rescind interchange price controls
filed with the regulators. if a third bank-owned national debit network
Americans of all stripes seek government morphed into a more credible competitor to
favor, and merchants are no exception. Mer- MasterCard and Visa.
chants want to pay less for card acceptance. In Regulators in the European Union, too, pine
particular, they’re exercised over interchange, for a third network to compete with MasterCard
fees that are set by the card networks and and Visa. Ideally—can you catch a whiff of pro-
are generally the largest component of card- tectionist and paternalist sentiment here?—this
acceptance costs. A number of merchants and network would be European.
merchant organizations have already sued the Is there a problem in the U.S.?
July 2008 • digitaltransactions • 55
Each stage in the American card- Nevertheless, the U.S. payments competition, collective price setting,
payments value chain is as competi- space continues to attract capital and and an anti-trust issue. He is entitled
tive or more so than any other on the entrepreneurs who believe they can to his abiding belief in the efficacy
planet. develop better mouse traps. There and goodness of a greater state role
Consumers and merchants have are a host of payment challengers managing the economy, but not to his
enormous choice. The card-issuance including Revolution Money, Tempo, own facts. The networks sell to but
and merchant-acquiring sectors deliv- Danal, Bill Me Later, and National are not controlled by banks.
ering American Express, Discover, Payments, several of which, notably What if Conyers’s bill passes?
MasterCard, and Visa products to Revolution Money and Tempo, trum- Card issuers, networks, acquirers,
consumers and merchants have long pet lower merchant fees. But that merchants, and consumers would all
been fiercely competitive, though net- implies higher costs and lower ben- be hurt.
works in the middle less so. efits for cardholders and is therefore Because issuers through inter-
A quarter century ago all the prin- not necessarily better. change capture the lion’s share of
cipal card-payment networks at the Most two-sided networks charge card-acceptance fees, they would take
heart of the system save AmEx were merchants and subsidize the spend the biggest revenue hit in absolute
owned by banks and not for profit. side to maximize transactions and terms, though they would offset it by
However, there’s been a sea change.
In 2004, a Justice Department suit
ended MasterCard’s and Visa’s prohi- If Conyers’s bill passes, card issuers,
bitions on member banks participat-
ing in AmEx and Discover. In 2006, networks, acquirers, merchants, and
banks spun off MasterCard. Morgan
Stanley spun out Discover in 2007. consumers would all be hurt.
And in March the largest network,
Visa Inc., went public. value. For the same reason ATM inter- introducing new cardholder fees and
Today the U.S. card-payment- change flows in the opposite direction: cutting reward programs.
network market is the most com- to merchants. Merchant-acquirer operating mar-
petitive in the world, bar none, and Networks’ asymmetric pricing, gins would be squeezed. Moreover,
becoming more so. EU regulators while not immediately intuitive, is whereas acquirers and independent
worry about having only two pan- hardly unique. It’s employed in a sales organizations have been push-
European credit and debit card pay- variety of two-sided markets. Con- ing back the card-acceptance frontier,
ment networks, one of which, Visa tent providers charge advertisers more they would no longer be able to prof-
EU, remains a bank association. In than subscribers. Client-side software itably serve many smaller, riskier, and
the U.S., there are four full-suite net- is often free while developers pay. non-traditional merchants.
works: AmEx, Discover, MasterCard, Bars sometimes give women, but not MasterCard and Visa would be
and Visa; national debit networks Star men, free drinks. affected by greater fee visibility with
and NYCE; and e-commerce gorilla issuer customers relative to dimin-
PayPal; all of which are commercial Who Will Reign? ished interchange, weaker pricing
enterprises independent of banks. Rep. Conyers contends merchants are power with acquirers, and reduced
At the other end of the spec- “forced” to accept payment cards. transaction growth.
trum, notwithstanding China’s World Patent nonsense. Cash is the only Card-payment products would be
Trade Organization commitments to payment product merchants are com- less competitive and displacement of
open up its domestic card market, pelled to accept. Some 7.2 million cash and checks would slow. Capital
China UnionPay continues to have merchants, and 10% more each year, pouring into payments would dry up.
a protected domestic card payment choose to accept cards because they And cardholders, with no voice at the
network monopoly. In Brazil, Rede- provide value and consumers want table, would be hit with a battery of
Card and VisaNet enjoy monopo- to use them, not because of network new fees and reduced benefits.
lies acquiring MasterCard and Visa coercion. Only government, ulti- The issue isn’t what prices are.
transactions, respectively, and pricing mately backed by armed policemen, It is how they’re set. In a free pay-
excluding interchange is almost eight- forces Americans to do anything. ments market, ultimately the con-
fold greater than in the U.S. Conyers argues MasterCard and sumer is king. In Conyers’s world,
Building critical mass in pay- Visa are associations “owned and con- Washington regulatory mandarins
ment networks is immensely difficult. trolled” by banks, implying a lack of would reign. DT
56 • digitaltransactions • July 2008