Visa and MasterCard’s Price Wars, Don’t Hold Your Breath

When was the last time you read about competition among the two giant credit card networks, which until recently were both co-owned by the same thousands of member banks?  [The banks still control a hefty share in MasterCard and full ownership of Visa, pending its possible IPO later this month].

Study most other industries and you will learn about real competition and aggressive marketing to win owner customers and market share.

JetBlue Airways and Virgin America represent the exact inverse of cartel-like price controls by agreement.  The two airlines are challenging each other in the Los Angeles market with super-low airfares, even those energy costs are at all-time record highs.  This is a study of competition gone right; some airfares to San Francisco and even cross -country to New York are at unheard of fares – $44 each-way from LAX to SFO and just $248 round-trip from LAX to JFK!

There are many choices, a variety of carriers and convenient flights to popular destinations.  Even though the airlines face supra-competitive interchange fees, and most tickets are paid for over the Visa and MasterCard network, where variable interchange fees are required, it is a study in how competition should work. 

Even so, MasterCard today questioned the European Union’s decision to force the credit card cartel to stop undermining real competition and innovations.   [See MasterCard news release].  Instead, they should review the airlines’ ability to fairly compete and remember that the two giant credit card associations own a suffocatingly large 80% payment network market share.   To merchants like us, MasterCard and Visa are anything but hip, as compared to the smart management leadership at Virgin and JetBlue.  

____________________________________________________

Want to know more about lead plaintiff ScanMyPhotos.com?  Click here and read their daily blog: Tales from the World of Photo Scanning

“MasterCard Files Appeal of European Commission Decision” (via MasterCard press release)

[Source: MasterCard Worldwide press release]

MasterCard seeks to annul decision which would harm consumers and undermine European competitiveness and innovation

    WATERLOO, Belgium, March 3 /PRNewswire-FirstCall/ — MasterCard Europe has applied to the European Court of First Instance to annul the European Commission’s decision on MasterCard Europe’s cross-border interchange fees, and said it believes it has strong grounds for its request. The December 19, 2007 decision requires the company, among other things, to repeal its intra- EEA fallback interchange fees by June 21st.

    The company reaffirmed its intention to comply with the Commission’s Order while the appeal proceeds, as well as its commitment to ensuring that its payments services remain competitive and continue to benefit its customers as well as the millions of European cardholders and merchants who rely on MasterCard and Maestro cards.

    MasterCard said its concerns with the decision focus on:

• The Commission’s failure to recognize that four-party payment systems cannot operate without default settlement terms between banks that issue cards to consumers and those that acquire transactions for merchants, which requires the setting of an interchange fee;
• The Commission’s refusal to recognize the efficiencies that four-party payment systems create and the fairness of MasterCard’s interchange fees; and
• The Commission’s inaccurate conclusion that, despite MasterCard’s May 2006 IPO, MasterCard and its customers continue to be “an association of undertakings”, and its mischaracterization of MasterCard’s interchange fees as decisions of an association that restrict competition under EC Treaty rules. 

“MasterCard firmly believes that market forces, not regulation, should drive key decisions such as the setting of interchange fees and retailers’ choices over which forms of payment to accept. If left unchallenged, and especially if followed by national regulators, the Commission’s decision would not only be bad news for consumers but a blow to the European payments industry,” commented Javier Perez, President of MasterCard Europe.   Perez continued: “From a business point of view, a payment system that does not allow for efficient recovery of costs is not sustainable in the long term, nor is it desirable because it limits the scope for innovation in payment services offered to consumers.   “The Single Euro(pean) Payments Area (SEPA) for payment cards, launched at the beginning of the year, will continue to require enormous investment and commitment by market players. It’s difficult to expect them to expand
into new markets when regulation lowers the incentive to take those risks.  In our view, the best way to proceed for the payments industry and SEPA is to follow the established European public policy principle of relying on competition to deliver what consumers want.”

“MasterCard Faces Probe, Details Auction-Rate Issues” (via Reuters)

Click here to read Reuters Feb 22nd article.

  

 Want to know more about lead plaintiff ScanMyPhotos.com?  Click here and read their daily blog: Tales from the World of Photo Scanning

“Mastercard Says Interchange Fees Probed in Hungary”

According to a MasterCard SEC filing, Hungary’s Competition Authority launched a probe and formal investigation of MasterCard Europe’s domestic interchange fees.  

  

 Want to know more about lead plaintiff ScanMyPhotos.com?  Click here and read their daily blog: Tales from the World of Photo Scanning

“How Credit Card Fees Inflate Prices of Goods” (Business Daily, in Nairobi)

A very worthwhile and detailed credit card interchange fee profile was written on Jan 28 by Wanjiru Waithaka for Business Daily, published in Nairobi.

The reporter raised questions that have been ringing non-stop by us for years.  Interchange fees should be lower in industrialized nations.  For a more global analysis, the reporter should look beyond their northern neighbors and research interchange fees in other nations too.

If they think interchange fees should be lower in Europe due to technology and infrastructure, what about in the U.S.?  Rates in the United States are, in some cases, more than double the fees charged by many EU nations.

Click here to view entire article.

The article’s highlights included these quotes:

• “[i]n Europe, telecommunications is efficient so they have low transactions costs and can argue that card fees are high compared to the costs.”
• “Frequent telecommunications failure also restricts banks from aggressively pushing retailers to accept card payments….  The market would grind to a halt because the existing infrastructure cannot support bulk usage of cards [in Africa].”
• “Although they provide a solid revenue stream for the card issuers, interchange fees are an irritant to merchants and can be among the largest and fastest-growing costs of doing business for many retailers.”
•  “The credit card interchange system therefore serves as a hidden tax, both on merchants and consumers, and raises the costs of all products regardless of the form of payment.”
• “In Kenya,  95 per cent of card business is controlled by Visa and merchants pay a fee to acquirers on each card transaction called merchant commission. “We pay a commission of three per cent and the price is set by the bank, we don’t negotiate the fee,” says Frank Kamau, general manager of Tuskys, a supermarket chain with 18 outlets.”
• “The acquirers share out the merchant commission as follows: a standard 1 per cent interchange fee goes to the acquirer, 0.5 per cent franchise or facilitation fee goes to Visa or MasterCard and the acquirer keeps the balance.”
  

MasterCard is Again Wrong

We can’t help but remark on the disconnect that MasterCard and its PR machine has in reaction to the EU ruling last week  [see news item]. 

The second largest credit card association, which was controlled by the same banks that are facing unparalleled billions in losses from the subprime mortgage crisis, is again misguided.  The company suggests that interchange rates for consumers will not go down.  They should know, because of their exhaustive leadership in what we assert is anticompetitive price-fixing and a fundamental adversity to competition.

In the real world of retail stores and real customers, competition lowers prices.  As the credit card giant is forced to end or limit its merchant interchange fees, the result will be that retailers will adjust prices; that is the way competition works, it’s economics 101.

While their PR machine is global, today’s Internet technology provides a more balanced opportunity to instantly respond to their games.  And, that is what we are doing, with daily news and commentary updates.  

 [Commentary: WayTooHigh.com]

MasterCard’s Public Relations Machine is Priceless in its Message

MasterCard Europe’s public relations spin machine is gearing up to assail its core customer base – merchants.

In our photo imaging business, the last thing we would want to lash out at are picture-takers.  As our industry transitioned from film to digital, we didn’t fight the trend, but adjusted to what is today a nearly 100% Ecommerce and digital imaging retail business.  No more film and interchange fees are just as antiquated too.

From what we are reading, rather than adjusting to the realities of today’s marketplace – where technological efficiencies and in vogue business practices preclude illegal price-fixing – the credit card giants are, instead, sniping at its customers.

Then again, when you study the lack of management at many financial institutions, which are facing billions in antitrust liabilities and billions more in subprime mortgage failures, it is more crystallized than ever that leadership and academic sophistication have taken a back seat to unbridled greed – that’s what happens when you operate an illegal cartel.

According to The FINANCIAL [click here], MasterCard Europe is cautioning consumers that rates won’t drop. RIGHT THEY ARE!, if MasterCard and Visa have anything to do with it.  Just study the results of the earlier litigation. But, from a merchant’s prospective it will because that is how a fair market economy operates when there is competition and no price controls. Unlike with Visa and MasterCard, merchants have competition and must adjust their fees to not a cartel pricing structure, but to the marketplace. Either way, until our antitrust litigation is resolved, Visa and MasterCard will be free to continue their corkscrewing interchange fee scheme which generates $40 billion each year for the banks. Last time there was this type of resolve, Visa and MasterCard simply raised other rates to adjust for their penalties, thus more than paying for their fines.The EU decision is indeed a wondrous holiday gift for all consumers and merchants, but one that will not be fully enjoyed for many months. It is another rejection of the justifications offered by MasterCard and Visa for fixing of interchange fees paid by merchants.   The Australian RBA, the UK OFT, and the earlier EU decision on Visa all have rejected the networks’ excuses. This decision, and the others, will certainly get the attention of U.S. courts, regulators, and Congress. It has piqued interest by U.S. merchants. It is long past time for the networks to reduce or eliminate interchange fees in the U.S. and worldwide rather than face crippling liability in U.S. courts.  There are nearly 100 separate merchant interchange fees in the U.S. and the domestic rates are more than double the interchange fees in many European nations.

The card associations hint they maneuver in a free market, but their multi-million dollar ad campaigns training consumers not to use cash and insist that debit cards be processed at the much higher signature credit card rates are more about market dominance and market power, where prices are illegally fixed by agreement. Of course consumers and retailers will benefit from the removal and decline of a $40 billion annual hidden tax that few understand.When was the last time a $40 billion annual fee did not hurt consumers?

MasterCard is reporting that “interchange fees benefit consumers by fairly sharing the cost of an electronic payment system among the two key beneficiaries of that system – cardholders and merchants.”  This is wrong and we are suing Visa, MasterCard and its leading member banks over these illegal fees which are anticompetitive and we assert is in violation of the law.

Way back when the credit card network functioned with antiquated, analog manual imprinters (and provided mountains of carbon copy receipts which had to be mailed away for processing) the interchange fees were cost based and had some justification.  Today, the electronic network is so efficient and its costs are a fraction (about 13%) of the total fees charged.

Just look at your local Costco and follow the plunge in flat-screen TV prices. If there was a giant monopoly controlling those electronic items, you wouldn’t have seen the prices fall from $15,000 for a plasma TV to just a few hundred dollars today for a much more efficient and superior flat-screen model. This is the business model Visa and MasterCard should be watching.

As a well-known retailer and Ecommerce business owner, 30 Minute Photos Etc. is always eager to take on the credit card cartel and explain the real facts, as we have been doing for several years and with more than 875 previous WayTooHigh.com news and commentary updates. We don’t invest in controlled market studies, but rather interact with real customers and business owners every day.

In this case, MasterCard even has its holidays wrong. From their prospective, it is not Christmas, but April Fools Day which is upon us; they proclaim that “merchants receive enormous benefits.” They should be explaining more about the $40 billion in fees that are attached to this holiday gift.

According to The FINANCIAL, “Merchants say that MasterCard prohibits them from disclosing to customers how much they pay for accepting payment cards. They know this is untrue. Merchants are free to disclose merchant discount fees, interchange fees, or any other costs they incur. But they choose not to disclose these costs to consumers just as they choose not to disclose any other cost of doing business, or how much they “mark up” their merchandise.”

At best, they are playing verbal shell games a la “Visa and MasterCard don’t collect interchange.” True as a factual statement, but inaccurate.  We merchants don’t directly pay Visa and MasterCard the interchange fees, but to a third-party. In or case, it is Chase Paymentech, which is owned by JPMorgan Chase, a named defendant in our merchant interchange litigation and most recently co-owner of both Visa and MasterCard [small word!]. Visa and MasterCard make it impossible for merchants to disclose the exact interchange fees for each transaction. 

1) In their operating rules (not in the merchant rules on the website but the hidden rules) they set certain fields that can be on credit card receipts and they do not allow a field for interchange (or merchant discounts or other costs), so we cannot put it on the receipt and comply with the rules;

2) Given both the complexity of the interchange fee schedules (MasterCard’s is 100 pages) and the lack of comprehensible identifiers on individual cards (either physical or electronic identifiers), merchants do not know how much they will be charged on an individual transaction;  

3) Visa and MasterCard could make it possible for merchants to identify and determine interchange on the front end but they do not.  As a merchant, we can better guess what the winning lottery numbers are than what the exact interchange fee charged per transaction was. There are nearly 100 separate fees and all are bundled into categories on our monthly statement.  Visa and MasterCard have pages and pages of confusing fee schedules on its website, which we challenge any merchant to fully understand, down to the penny;

4) A respectable solution, until our litigation is resolved, is for MasterCard and Visa to post the exact interchange fee charged on every debit and credit card receipt. This is the defination of “transparency.”  MasterCard’s posted Merchant Rules are so weighty, but not fully followed, even by them.  We regularly notice retailers posting minimum purchase requirements, but are unfamiliar whether MasterCard and Visa fully engages each violation. We even pointed out that the American Red Cross had a $5.00 minimum charge on its website. How many restriction signs do you regularly see near the register warning that payment cards are only accepted if above a certain amount? Competition not cartels should control prices, and any smart business will prudently pass on the reduced interchange fee savings to consumers.

[Commentary: WayTooHigh.com]

“MasterCard Europe to Challenge European Commission Decision on Cross-Border Interchange Fees” (MasterCard Press Release)

Click here to view MasterCard Dec 19 news release. 

If Adopted Across the EU, Decision Could Lead to Higher Cardholder Costs and Fewer Electronic Payments, and Impede the Implementation of SEPA

Waterloo, Belgium and Purchase, NY, December 19, 2007 – MasterCard Europe said that it will appeal to the European Court of First Instance today’s decision by the European Commission regarding MasterCard Europe’s default cross-border interchange fees. The Commission’s Order requires the company, among other things, to “repeal [its] Intra-EEA fallback interchange fees, as well as [its] SEPA/Intra-Eurozone interchange fees” within six months. The Order applies only to “interchange fees for MasterCard branded consumer credit and charge cards and for MasterCard or Maestro branded debit cards”.MasterCard Europe believes that it has strong grounds for its appeal. While it will comply with the Commission’s Order, the company said that it is prepared to take action so that its payment products remain competitive and continue to benefit the millions of European cardholders who use and merchants that accept MasterCard and Maestro cards.

MasterCard Europe said its decision to appeal is based on its firm conviction that market forces, not regulation, should drive key decisions such as the setting of interchange fees and retailers’ choices over which forms of payment to accept. The company also pointed to the experience in Australia, the only other jurisdiction in the world to regulate interchange fees, where consumers have ended up paying more for credit cards and receiving fewer benefits and less choice.

If left unchallenged and adopted by national regulators, the Commission’s approach would not only be bad news for consumers but a blow to investment and innovation in the European payments industry, resulting in slower implementation of the Single Euro(pean) Payments Area (“SEPA”), MasterCard Europe said today.

Commenting on the decision, Javier Perez, President, MasterCard Europe, said:

“We are disappointed that after years of review of MasterCard Europe’s transparent, default cross-border interchange fees, the Commission failed to appreciate that without a mechanism to fairly share costs among all the participants in a payment system that functions across Europe and around the globe, consumers will be hurt. Although MasterCard Europe itself does not receive any revenue from interchange, it, like all other payment systems, must balance the needs of, and costs to, both cardholders and merchants in order to remain competitive and innovative.

“The Commission has also ignored the experience in Australia where regulators forced down interchange fees, resulting in higher cardholder charges, reduced card features and benefits, less competition, and diminished investment and innovation. Moreover, there is no evidence that consumers benefited from lower merchant prices as regulators predicted. Not surprisingly, the Australian payment card business has seen slower growth since regulation was introduced.”

Given that the Commission’s Order appears to call for an even greater reduction in interchange fees than occurred in Australia, the adverse effects on European consumers could be even more severe.

Perez continued:

“Forcing drastic reductions in interchange fees across Europe could delay implementation of SEPA, as well as reduce incentives for payment institutions to expand into new domestic European payments markets. In addition, a large reduction in issuers’ revenues would force cutbacks on the necessary investments in new services and technology. This goes directly against the goal of establishing a single market for payments throughout the euro area and the European Union as a whole so that all consumers can pay for goods and services across national borders with the same ease and under the same conditions as when they make payments at home. Because we are strong supporters of SEPA, we are very concerned that the Commission’s decision casts a shadow of uncertainty over this effort and, ultimately, will hurt European competitiveness.

“Far from providing clarity, today’s decision leaves MasterCard Europe and the entire payments industry in doubt as to what interchange fees the Commission will allow.

“Europe wants to reduce reliance on cash in favour of electronic payments, which are safer, cheaper, more secure and more convenient for consumers and merchants alike. The best way to accomplish this is to allow open, transparent and efficient payment systems like MasterCard and Maestro to compete unhindered in the market,” he said.

“And, as is often the case when market forces are supplanted by regulation, it is the smaller merchant and less-well-off consumer that will be hurt the most,” he added.

MasterCard Europe has not yet received a copy of the Commission’s decision. However, based on the Order and the arguments advanced by the Commission during the proceeding, the company believes that the Commission has failed to appreciate that, in order to compete successfully with three-party systems and other forms of payment, four-party payment systems like MasterCard and Maestro need to deliver value to cardholders and merchants. This requires interchange fees or some other cost-balancing mechanism.

Perez concluded:

“While we will meet all of our legal obligations during the appeal, MasterCard Europe will take action so that its payment products continue to benefit cardholders and merchants, and remain competitive. Despite our disagreement with the decision, as we have done in the past, we will continue to seek common ground with the Commission in order to serve the interests of European consumers and merchants.”

In open, four-party systems like MasterCard and Maestro, the four parties are the cardholder and his or her bank (the “issuer”) and the merchant and its bank (the “acquirer”). Default interchange fees, which have been part of the MasterCard system for more than 40 years, have proven to be the most transparent and efficient way to balance the costs and benefits among these parties and promote a healthy, competitive and innovative payments industry.

Interchange is a small fee paid by the acquirer to the issuer, and is typically passed on as a component of the fee merchants pay for the many benefits they receive when they choose to accept payment cards. These include increased sales, fast and secure payment, and protection against fraud and cardholder default. Without interchange fees or some other balancing mechanism, cardholders would have to pay nearly all of the costs of the payment card system. MasterCard believes not only that this would be unfair but that, in the long run, it would not even be in the merchants’ best interest. This is because it would lead to greater reliance on cash and more expensive three-party system cards, like those of American Express, where the payment company acts as both issuer and acquirer and typically charges merchant fees that are higher than those of MasterCard and other four-party systems.

Overview: Popular WayTooHigh.com Interchange Commentaries

Interchange Fees Should Have Gone the Way of the IBM Selectric Typerwriters (WayTooHigh.com)

An Extraodinarily Fictional Read: MasterCard® Explains the Value of Interchange Fees (WayTooHigh.com)

Sixty-percent Rate Cut in 2008 by MasterCard Europe (Commentary, WayTooHigh.com, via WSJ)

Seventy-two pages, five-pages or one line? (WayTooHigh.com)

Every Credit and Debit Card Receipt Should Include Interchange Charge (WayTooHigh.com)

Merchants sue MasterCard, Visa over ‘exorbitant’ interchange rates

Four-million “pay-pass” cards are another four-million more reasons to end Interchange fees (Commentary: WayTooHigh.com)

British Regulator “Slams Mastercard Fees” (BBC NEWS)

Summary: Briefing on Interchange Issues (WayTooHigh.com)