UPDATE: An Extraodinarily Fictional Read, MasterCard® Explains the Value of Interchange Fees

According to a posting on the MasterCard® Newsroom pages, the second largest credit card association writes (what we assert is) extraordinary fiction.

Click here to read it in their own words.

This is MasterCard’s attempt to justify the annual $40 billion fee that merchants and consumers are forced to pay; many are unaware of this hidden tax.

While MasterCard explains that “a number of merchants and merchant trade groups have filed several lawsuits alleging that the U.S. interchange fees that MasterCard establishes violate antitrust laws, and that the cost of interchange is too high,” the litigation is a class-action which represents all merchants – not just a few.

The litigation was brought on behalf of us (30 Minute Photos Etc.), as lead plaintiff, and other businesses and trade associations across the country, not by lawyers. Rather than address the damages, the card association’s published points accuses lawyers for seeking these cases to enrich themselves, rather than discussing the billions-of-dollars that benefit the member banks.

In the case of ScanMyPhotos.com (a division of 30 Minute Photos Etc.) we agree with MasterCard that “every business establishes a price for the goods and services it provides.” in our case, we commercialized an entirely new business model around digitally preserving generations of analog pictures; we designed a technology and operation that also provides ultra low fees. We are not a cartel that artificially fixes prices, in fact, we regularly share our story with the entire photo imaging industry and regularly speak at trade shows like the Photo Marketing Association and even at last January’s (CES) Consumer Electronics Show convention – our rates and how it case about are a secret to nobody.  We will again address CES in January 2008.

In our opinion, the biggest misuse of words is MasterCard’s explanation that the interchange fee benefits to merchants is that it is a “small fee.” Forty-billion dollars each year is anything but a small fee. MasterCard does not fully address the history of these fees and fails to explain that it was created to be cost-based – to cover the manual credit card imprint costs and weighty processing charges incurred when merchants had to mail the paper receipts to have it processed. Today, it is mostly electronic, lightening-fast; and even faster than our super-speedy photo scanning business.

They even use the word “incredible” [”Accepting payment cards provides merchants with an incredible value at a fair price.]” They are right, it is incredible, as in so implausible as to elicit disbelief.

The reality is that with a nearly 80% market dominance, MasterCard and Visa® (which until recently were both owned and controlled [Visa is preparing to launch an IPO] by its member banks) are a monopoly. They control the market. Merchants, like us, are unable to choose not to accept their debit and credit cards – we would be out of business – especially companies like us with a dominant ecommerce revenue stream.

As for interchange fees, it certainly does “help foster… security” but not so much for consumers, as explained by MasterCard, but for the member banks, which look forward to this extraordinarily large cash-cow and unbridled revenue stream; it’s a tax few know about, but generates non-stop riches for MasterCard, Visa and its member banks. If they were so concerned about fraud costs, they would cease the issuance of billions of direct mail solicitations and providing credit cards to risky consumers. Today’s technology is also helping to lower other types of fraud costs, yet interchange fee adjustments do not reflect the cost savings either.

The fees do encourage “banks to innovate and develop new payment options,” but in some cases, to the detriment of cardholders and merchants. Look at the one-hundred plus separate merchant interchange fees which create new revenue streams every time a new innovative scheme is hatched to plunder more money from retailers and cardholders.

When reading the MasterCard explanations, they even discuss how the payment industry is “competitive.” As we see it, the only contest they host is one-way, and the competition is to seek out new ways to increase interchange fees. With an 80% market share, competition is a fleeting dream. Why are rates about 1.7% for an average transaction in the U.S., but only .7% in the U.K, .55% in Australia, and 0.0% for PIN-based cards in Canada?

And, according to MasterCard, they do “recognize that merchants do want lower costs for all aspects of their business.” It is encouraging that they recognize this fact, but if they strive to help lower interchange costs, why then are fees regularly rising?

Words and actions are very different when it comes to interchange issues and our WayTooHigh.com Credit Card Interchange Reportboasts 875 postings since February, 2005. WayTooHigh.com provides our prospective as a long-time retail and ecommerce business.

[commentary: WayTooHigh.com, originally posted Aug 23, 2007]

The Difference Between a Debit and a Credit Card

A customer just had us [ScanMyPhotos.com] digitally preserve 1,000 photos onto a DVD while they waited.  This is a very typical customer and because the payment card was identified as a “check card” we pressed the “debit” button on the electronic payment terminal and handed the person the key pad to enter their PIN number.

They paused and asked us to enter it as a credit card, even though the card was a check card.  Many sales clerks would have had difficulty even differentiating between a check / debit card and a credit card – this one had hard-to-read black lettering, which is part of Visa, MasterCard and its member banks design tricks to confuse retailers into accepting the card at the much higher signature credit card rate.

As the customer requested, we reentered the transaction as a credit card, even though the funds are quickly removed from their checking account anyway.  The merchant interchange charge to us was about $1.35, rather than a flat fee of about $0.25 – $0.50 if the transaction was processed as a PIN-based debit card.  Note: PIN transactions are much more secure than signature card entries, yet the fees are a flat, and often much lower rate. 

Eighty-five cents is not, by itself a great deal of lost revenues, but when added with millions and millions of other transactions every day, retailers are faced with extraordinary fees.

[Commentary: WayTooHigh.com]

Visa and MasterCard Gift Cards: Almost as Profitable as Interchange Fees

Visa and MasterCard are promoting their prepaid gift cards. MasterCard promotes this as “perfect for friends and family.”  It’s even more perfect for them and its member banks.

Why?

If you are like us, we recently used a prepaid credit card, but ran into trouble when the balance remaining entered single digits.  Not even Starbucks would accept the card, the message explained that the card was not valid. Think of the discomfort when you have only a few dollars remaining on your gift card. What do you do? The card associations and member banks hope that you just discard the plastic gift card, and then, guess who makes even more money, in addition to the merchant interchange fee billed when the gift card was purchased with plastic to begin with.

From the MasterCard website they offer the below advice, but, for us, the sales clerk was unable to handle this transaction and just passed back the card. Even MasterCard acknowledges that not all merchants can handle that transaction, and thus the open balance ends up back in the member bank and the card associations pockets.  MasterCard promotes that their cards are “more flexible than retail gift cards” which put them in a precarious position of competing with their core customer – the merchants, and fails to explain that retail gift cards can easily be drawn down to a zero balance.

What happens if I need to return an item I purchased using my MasterCard gift or other prepaid card?  “Yes, you can still use your MasterCard prepaid card. Just tell the cashier in advance how much to deduct from your prepaid card and how much you will pay using an alternate payment method such as your Debit MasterCard card. Note that this process, known as split tender, may not be supported by all merchants.

“Bah-Humbug!

[Commentary: WayTooHigh.com]