The Broken Link - Digital Transactions

THE GIMLET EYE
FEBRUARY
2008 • VOL. 5, NO. 2
How the Merchants’
Courthouse Capers
Have Paid off
Forty billion dollars.
That’s how much Digital Transactions estimates merchants in this country
paid bank card issuers in 2007 for the privilege of accepting their products
in payment for goods and services. Nor is the rate of increase in this cost a
minor matter. We estimate that tab is up 16% from 2006.
It’s called interchange, and it’s the primary component of all the costs merchants
pay to accept cards. Unlike the other components, it flows straight to issuers, and
increasingly it’s helping to pay for all the rewards banks like to lavish on their cardholders
these days. The more rewards cards, the higher interchange climbs.
The great question is, what should merchants do about it? So far, their tendency
has been to complain to regulators and Congressmen and haul the bank card networks,
which set interchange, into court. The regulatory gambit hasn’t fared well
here, but in Europe merchants scored a victory in December when the European
Commission ruled MasterCard’s interchange setup is anti-competitive. See our
story—and more about how we calculated our interchange estimate—on page 8.
As for the courts, a federal judge in Brooklyn is now presiding over a class action
that consolidates about 50 separate suits brought by merchants and merchant associations
against the card networks and some banks.
We’ve gone on record more than once opposing these moves. They are clumsy,
expensive campaigns to fix a problem merchants would be better off addressing by
adopting and encouraging any of the many alternative forms of payment that have
cropped up recently precisely to address the problem of rising acceptance costs.
But we have to credit the merchants’ legal maneuvering for one signal achievement
that may indeed have a long-term impact on interchange. The heavy hand of
potential legal liability has done much to force both MasterCard and Visa to shed
their historical bank ownership and governance in favor of public ownership. As
early as next month, Visa will float its shares publicly for the first time, following
the example set by rival MasterCard in 2006. These IPOs are events fraught with
significance, but it cannot escape the attention of most merchants that one result
will be that the card networks may no longer be dominated by entities that collect
interchange, and thus benefit directly from discouraging any innovation that threatens
that income stream.
On the contrary, the new owners will have every incentive to foster new products,
and no perverse incentives to quash them. That can only be advantageous to
merchants in their quest to control acceptance costs. And, unintended though it
may be, it’s a direct benefit of their legal onslaught.
John Stewart, Editor-in-Chief
john@digitaltransactions.net
PUBLISHER
Robert A. Jenisch
EDITOR-IN-CHIEF
John Stewart
Senior Editor
Jim Daly
Correspondents
Jane Adler
Lauri Giesen
Karen Epper Hoffman
Peter Lucas
Linda Punch
Art Director/Production Editor
Jason Smith
Editorial Advisory Board
Eula L. Adams
Member of the Board of Directors,
NetBank and Solidus Networks
John Elliott
Alex W. “Pete” Hart
Former Chief Executive Officer, MasterCard
International
William F. Keenan
President, De Novo Corp.
Dr. Gideon Samid
Chief Technology Officer, AGS Encryptions Ltd.
Director of Advertising
Robert A. Jenisch, 877-658-0418
bob@digitaltransactions.net
Advertising Sales Representative
Cathy Woods, 602-863-2212
cathy.woods@mediawestintl.com
Digital Transactions, Digital Transactions News,
and digitaltransactions.net are publications of
Boland Hill Media LLC, 3 Golf Center, Ste. 314,
Hoffman Estates, IL 60169
John Stewart, Managing Director
Robert A. Jenisch, Managing Director
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6 • digitaltransactions • February 2008