By Holly Reeves
Mastercard and Visa: $50 billion villains?
Retailers have long fumed about the cost of accepting credit cards. Those swipe fees, also known as interchange, are set by payment service providers (such as Visa and MasterCard) as a small percentage of the sale value and most of the money ultimately goes to banks. They say they use it to fund security and technology upgrades and cardholders’ beloved rewards programmes.
These fees on debit and credit cards are many retailers’ second-largest operating cost, behind labour. This is arguably an under-reported scandal, allowing these providers to dominate the market to the extent that they can fix fees; squeezing retailers and increasing costs for consumers.
The Southeast Asian financial technology (fintech) market is still in its early years and, as yet, there has been no significant legislative effort to tackle the price-fixing problem. However, in Australia, the US and the European Union (EU) steps have been taken to break the card payment processing cartels.
Using the US as an example, prior to a high-profile case which brought limits to fees financial institutions could run a 500 per cent profit on debit cards and as much as 10,000 per cent on credit cards. Interchange had swollen to a US$50 billion business; most of it profit for the banks. The provisions put in place in 2012 halved fees and forced Visa and Mastercard to make a $7.25bn settlement. However, this ruling is under threat.
To understand where the price-fixing claims lie, it helps to know how the card industry works. The major credit-card associations, Visa and MasterCard, provide the brand name and authorisation service. Banks and other financial institutions buy shares in one or both groups, which makes them association members and gives them the right to issue Visa and MasterCard credit cards.
The issuers then make money from fees and interest on cash advances and overdue payments levied on cardholders. The associations are paid by issuers for every credit-card authorisation they process..
In virtually every other marketplace competition results in lower prices, but Visa and MasterCard control a system that is accused of being fundamentally anti-consumer. Because they want to encourage more banks to issue their cards, Visa and MasterCard actually compete with one another to charge higher credit card interchange fees.
According to retailers, these fees have become increasingly painful thanks to standard rules and default interchange fees for services vital to modern business. The first of their complaints is about the honour-all-cards rule. This requires a merchant that accepts any Visa or MasterCard credit card to accept all such payments, no matter which bank issued the card.
At the same time, the all outlets rule requires merchants that accept Visa or MasterCard payment cards at any location to take those cards at all of their locations. Finally, the no surcharge rule prohibits retailers from imposing an additional fee on consumers for the use of Visa or MasterCard payment cards. This prevents merchants from creating incentives for consumers to use cards that have more attractive terms.
So can the Southeast Asia fintech market learn lessons from developed markets in any future action on interchange fees? Across the EU, the Payment Services Directive limits charges to 0.3 per cent for credit cards and 0.2 per cent for debit cards for both national and cross-border transactions. This should help to redistribute revenue from issuing banks to merchants and consumers. Some estimates suggest retailers will save as much as 25 per cent per transaction.
Australia’s new rules will be even stricter, applying a cap for both consumer and commercial cards. This regulation is expected to have a significant impact on the landscape, especially on rewards programmes as well as rebates and sign-on bonuses. In light of these challenges, some Australian issuers may look to develop new propositions and enter other markets within the region. Nevertheless, interchange caps are already in place in some other Asian markets and many others may face similar regulations in the future.
Closer to home Malaysia has also taken a stand against charges, bringing limits on fees into the local market in 2015. They directly address the inequality of the system noting that via higher prices charged by merchants to cover costs, “consumers who do not use payment cards may end up subsidising the cardholder rewards enjoyed mostly by premium cardholders.” Under their rules domestic debit card transactions attract fees of 0.15 per cent, and payments to the government should attract no fees at all.
For payment card powerhouses like Visa and MasterCard, the imposition of interchange caps will affect income – particularly as they will be expected to absorb many of the costs associated with cross-border transactions. However, a new, simpler pricing model should encourage more card payments, which together with the additional volume of transactions may reduce revenue shortfall.
Price-fixing is obviously unhealthy in any market and it is right that steps should be taken to protect consumers and retailers. However, action against interchange fees may well be a double-edged sword for consumers. It is not certain that merchants will pass on a cut in rates as a cut in prices, and the demise of interchange will undoubtedly have implications for funding rewards programmes.
Asia is the world’s key growth market for card payments, and electronic transactions need to boom for Southeast Asian economies to continue developing their digital economy and wider economic growth. Now is not the time to step away from attractive sign-up packages for consumers. Now is not the time for villains. For a successful future for all, Visa and Mastercard must stop fixing prices and start fixing their business plan.