Interchange Inflation

The Wall Street Journal reported last week that Visa and Mastercard are preparing to raise the interchange fees that merchants pay when they accept credit cards. The fee increases are expected to take place in October and April and focus on online purchases.

While I am a fan of credit cards (hence, Cards For The Win), I am not a fan of this change. Back in 2020, the networks had planned to raise rates, but then they delayed doing so due to the economic impact of the COVID-19 pandemic.

Right now, as I’ve previously covered, there is pending Federal legislation that would regulate credit cards further both on rates and by requiring that cards carry two competing networks to attempt to break the duopoly of Visa and Mastercard.

I don’t understand why the networks would raise rates at a time when Congress is considering making fundamental changes to regulate the industry. Maybe it’s a sign of how powerful Visa and Mastercard believe they are. Maybe it’s just bad timing.

Interchange is charged as a percentage of a purchase. It is already something that merchants feel is too costly. While the average fee that works out to between 3% and 4% is a pretty small amount, for a large business, it is a significant amount of money. Furthermore, when many types of businesses like discount stores, grocery stores, and convenience stores operate on single-digit margins, paying 3% to 4% to the credit card networks feels like an insult.

Relative to the cost of handling cash, bad checks, or lost sales, I think that 3% is a pretty good deal. That doesn’t mean there is any cause to raise rates, however. Since the fee is a percentage, our recent inflationary cycle means the networks are already earning substantially more money on transaction volume.

I believe that some arguments have been (or will be) made about increasing fraud in the system. Fraud does cost issuers money–not all of that interchange goes to rewards. One of the great features of credit cards is the zero-dollar liability guarantees. Processing that dispute with a merchant is expensive for the issuer ($25 to $50), plus sometimes they take the loss instead of the merchant. That said, at the scale that the network runs, it should be getting progressively more efficient, not less.

It’s also concerning that the networks are making changes at the same time. The networks are supposed to operate independently.

As prices go up, more and more merchants will either stop taking cards (and take cash, Venmo, Zelle, etc.) or create cash discounts. The networks may price themselves out of their position of power.

To me, this fee increase misses the moment and understanding of the economic situation.

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Plastic is Not Good for the Environment

Plastic is everywhere. Very little is recycled or reused. Plastic, once created, will be around for the rest of your lifetime, and far longer. American Banker published a piece last week on plastic cards. The idea that your credit card is plastic is so engrained in concept that we call it “paying with plastic.”

According to research, “The financial services industry ships over 3 billion new cards each year.” In addition to the plastic, most cards have electronic components such as chips in them. Banks are now exploring new cards that are not made out of plastic. Bank of America shows a recycled plastic logo on its new cards. Others are opting for cards made out of bio-sourced materials. However, cards like these are biodegradable only under the right conditions.

Folks in the industry have been exploring environmentally friendly solutions for decades, but it is hard to meet card standards with alternative materials. US Bank offers a card made from recycled ocean plastic.

With the growing ubiquity of digital cards, issuers should consider making physical cards available only on demand.

Totem Update

Also from American Banker, Totem, which I covered in CardsFTW #66, is embroiled in a fight between founders. The article is entitled “Does a spat between fintech founders spell doom for the company?”

I can’t speak to the challenge or veracity of claims at Totem, but the answer to that question is “not always, but probably in the early stage”

It is so hard to get a company off the ground that a legal dispute between founders is likely to cause a company to fail. Investors will stay away from the company and the team will be immensely distracted.

The news is disappointing because Totem is a great idea for a neobank to serve a specific market. I hope the team is able to resolve this, or others can take up the cause.

More Cardless Coffee

Starbucks has long been an innovative payments company that also sells coffee. The Starbucks mobile wallet handles billions in deposits and transactions. (More than $1.6 billion, according to Finextra) Buying coffee with the Starbucks mobile app via QR code is quite easy and integrates both loyalty and payments.

Techcrunch reported last week that Starbucks is testing a geo-located upgrade to Starbucks cards that would allow users to pay without scanning. Forget leaving your wallet in your pocket, now you can leave your phone wherever it is and just pay! Square tried something like this back in 2013 or so with geolocation and face/name verification at Square POS locations.

I love this stuff. Payments are the plumbing of commerce, and the more we can make it fade into the background, the better.

I enjoy shopping at the Amazon Fresh store because I scan my palm, collect my goods, and walk out. It’s easy and still charges to my preferred credit card. Compared to many stores that are locking up more and more goods due to theft, the idea of making just walking out with something easier and legal is a winner.

CardsFTW

Thanks for reading CardsFTW, a debit and credit newsletter by Matthew Goldman. Matthew is the founder of Totavi, LLC, which provides GSD Product Consulting with real operational value. Visit totavi.com to learn more and engage us.

* Indicates a company with whom Matthew Goldman or Totavi, LLC has a financial relationship.