CHICAGO — An executive with MasterCard Worldwide came outswinging in defense of card interchange at an internationalpayments conference last week, arguing that current rates are nottoo high and a strong case could be made to raise them.
“I am going to preface my remarks today by confessing my bias,”said Josh Peirez, the group executive for innovative platforms forMasterCard Worldwide. “I believe in fair prices set by free marketsthat represent the free choices of millions and hundreds ofmillions of consumers. I believe those markets and their choiceshave brought us a payments system which benefits all itsparticipants,” he added to scattered but vigorous applause.
The conference theme, “Payments Pricing: Who Bears the Cost,” setthe atmosphere for the fight and a mix of participants brought thetension to a head during a panel that included Peirez andmerchants.
Wendy Sutton, an executive with the TJX Companies, which had thesecond largest card security breach ever, tried to make a quietercase. She argued that the retail chain could neither refuse to takecredit cards nor directly negotiate their interchange and notedthat issuers and retailers needed consumers-a population that doesnot understand or care about interchange.
“Consumers really don't care about interchange and would probablynot care about whether we passed it along in somewhat higherprices, provided all retailers did it,” she suggested. But, sheadded that consumers' desire for lower prices kept TJX from passingon interchange costs.
She maintained that while TJX's income from merchandise had stayedflat or even fallen slightly, the costs of making card transactionshad continued to rise. “The competitive marketplace will not allowus to just pass these costs onto our consumers,” she said.
Sutton did not speak to her company's data security breach or whatthe impact of card security costs to both merchants and issuersmight have on the interchange question. Last year's paymentsconference had taken up the security question, and neitherparticipants nor presenters seemed willing to revisit it.
Michael Cook, a vice president and assistant treasurer for Wal-MartStores Inc., stated that card interchange was the retail chain'sthird largest ongoing expense, costing more than even healthinsurance for its employees.
“I am sure glad I don't have their health care,” one lawyerrepresenting a Dallas-area merchant said sotto voce.
Peirez rose like a lion to the defense of card interchange, firstattacking what he called the myths being spread about it, such aswhat MasterCard had actually done in Europe and as well as some ofthe fundamental assumptions of the conference itself.
“Payments Pricing: Who Bears the Cost,” Peirez said in noting theconference title. “I think a more accurate and balanced title wouldhave been 'Payments Pricing: Who Bears the Costs and Who Gets theBenefits' because, trust me, there are benefits, lots of them, andmost of them to consumers and retailers.”
Peirez pointed out that merchants accepting cards get credit saleswith no credit risk, increased sales and sale volume, greater speedat check out, lower cash and check costs and higher customersatisfaction.
Consumers get an open-end line of credit, often with rewards, zeroliability if their card is lost or stolen, the speed andconvenience of buying with cards, nearly universal acceptance, evenoverseas, an interest-free loan in the form of the grace period, hesaid.
He added that merchants and issuers get these benefits even thoughcard issuers also face costs such as the cost of funds, creditlosses, billing and collections, compliance, customer service,technology and fraud.
“In 2006,” Peirez said, “a much stronger year than this one I thinkwe can all agree, the average interchange fee in the MasterCardsystem was 1.81% versus an average credit loss of 2.41%, as apercentage of transaction volume. This number is likely to be muchhigher this year,” Peirez said, “but interchange fees have remainedlargely stable.”
Peirez also challenged the notion that there was a lack ofcompetition in the payments system. In addition to the other cardbrands, Peirez pointed out that MasterCard competes with cash,checks (both paper and electronic), ACH, traveler's checks, giftcards, Paypal and other growing payment alternatives.
“If someone believes our payment methods are too high, drive volumeto our competitors. Don't try to step in with the government for anonmarket, artificial measure,” he maintained.
Peirez drew attention to the presentations from the regulators atthe conference, particularly those from the European Union andAustralia. To the former he pointed out that MasterCard has not yethad its day in court in Europe and felt very confident of itsposition. To the latter, he questioned why the Reserve Bank ofAustralia could not draw any conclusions from the lack of evidenceof lowered prices following lower interchange rates.
“If one thing is certain: it is that consumers lose wheninterchange is cut or capped,” Peirez said. “Consumers pay highercosts for credit, get few benefits from using credit and don't seeany drop in prices. Further, merchants also lose, as theavailability of credit slides, they also make fewer sales. If thereis an interchange problem at all, the solution is competition andinnovation, not regulation.”
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