CHICAGO — An executive with MasterCard Worldwide came out swinging in defense of card interchange at an international payments conference last week, arguing that current rates are not too 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 for MasterCard Worldwide. “I believe in fair prices set by free markets that represent the free choices of millions and hundreds of millions of consumers. I believe those markets and their choices have brought us a payments system which benefits all its participants,” he added to scattered but vigorous applause.
The conference theme, “Payments Pricing: Who Bears the Cost,” set the atmosphere for the fight and a mix of participants brought the tension to a head during a panel that included Peirez and merchants.
Wendy Sutton, an executive with the TJX Companies, which had the second largest card security breach ever, tried to make a quieter case. She argued that the retail chain could neither refuse to take credit cards nor directly negotiate their interchange and noted that issuers and retailers needed consumers-a population that does not understand or care about interchange.
“Consumers really don't care about interchange and would probably not care about whether we passed it along in somewhat higher prices, provided all retailers did it,” she suggested. But, she added that consumers' desire for lower prices kept TJX from passing on interchange costs.
She maintained that while TJX's income from merchandise had stayed flat or even fallen slightly, the costs of making card transactions had continued to rise. “The competitive marketplace will not allow us to just pass these costs onto our consumers,” she said.
Sutton did not speak to her company's data security breach or what the impact of card security costs to both merchants and issuers might have on the interchange question. Last year's payments conference had taken up the security question, and neither participants nor presenters seemed willing to revisit it.
Michael Cook, a vice president and assistant treasurer for Wal-Mart Stores Inc., stated that card interchange was the retail chain's third largest ongoing expense, costing more than even health insurance for its employees.
“I am sure glad I don't have their health care,” one lawyer representing a Dallas-area merchant said sotto voce.
Peirez rose like a lion to the defense of card interchange, first attacking what he called the myths being spread about it, such as what MasterCard had actually done in Europe and as well as some of the fundamental assumptions of the conference itself.
“Payments Pricing: Who Bears the Cost,” Peirez said in noting the conference title. “I think a more accurate and balanced title would have been 'Payments Pricing: Who Bears the Costs and Who Gets the Benefits' because, trust me, there are benefits, lots of them, and most of them to consumers and retailers.”
Peirez pointed out that merchants accepting cards get credit sales with no credit risk, increased sales and sale volume, greater speed at check out, lower cash and check costs and higher customer satisfaction.
Consumers get an open-end line of credit, often with rewards, zero liability if their card is lost or stolen, the speed and convenience of buying with cards, nearly universal acceptance, even overseas, an interest-free loan in the form of the grace period, he said.
He added that merchants and issuers get these benefits even though card issuers also face costs such as the cost of funds, credit losses, billing and collections, compliance, customer service, technology and fraud.
“In 2006,” Peirez said, “a much stronger year than this one I think we can all agree, the average interchange fee in the MasterCard system was 1.81% versus an average credit loss of 2.41%, as a percentage of transaction volume. This number is likely to be much higher this year,” Peirez said, “but interchange fees have remained largely stable.”
Peirez also challenged the notion that there was a lack of competition in the payments system. In addition to the other card brands, Peirez pointed out that MasterCard competes with cash, checks (both paper and electronic), ACH, traveler's checks, gift cards, Paypal and other growing payment alternatives.
“If someone believes our payment methods are too high, drive volume to our competitors. Don't try to step in with the government for a nonmarket, artificial measure,” he maintained.
Peirez drew attention to the presentations from the regulators at the conference, particularly those from the European Union and Australia. To the former he pointed out that MasterCard has not yet had its day in court in Europe and felt very confident of its position. To the latter, he questioned why the Reserve Bank of Australia could not draw any conclusions from the lack of evidence of lowered prices following lower interchange rates.
“If one thing is certain: it is that consumers lose when interchange is cut or capped,” Peirez said. “Consumers pay higher costs for credit, get few benefits from using credit and don't see any drop in prices. Further, merchants also lose, as the availability of credit slides, they also make fewer sales. If there is an interchange problem at all, the solution is competition and innovation, not regulation.”
–dmorrison@cutimes.com

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