The high cost of credit card swipe fees is getting more attention these days and it’s not just from Main Street retailers. America’s favorite pastime, baseball, has now stepped up to the plate and joined the fight against these skyrocketing fees as the Minnesota Twins just levied an antitrust suit against Visa and MasterCard, accusing them of price-fixing swipe fees and monopolizing the marketplace.
Make no mistake about it, this insidious fee impacts businesses of all shapes and sizes. Any purchase paid for by plastic is subject to a swipe fee of two to four percent of the price of the transaction whether you are buying a ticket to a baseball game or picking up a gallon of milk from the corner grocer.
Take, for instance, the cost of a Super Bowl ticket from earlier this month. The face value of tickets ranged anywhere from $500 to $2,600. Two percent of $2,600 is $50. If that ticket is sold at the average $4,300 resale price through a ticket dealer, the bank will take in another $86. That’s nearly $150 in swipe fees on a single ticket and with 83,300 seats in the MetLife Stadium, the banks and credit card companies brought in millions of dollars for transactions that could have been done profitably for mere pennies. Given this, it’s no small wonder that families in the United States pay an estimated average of almost $500 a year in swipe fees.
For more on the Minnesota Twins’ lawsuit against Visa and MasterCard, see here.
Tuesday, February 11, 2014
Monday, February 10, 2014
Chip and Pin: Not a Simple Quick Fix
In her article, 'Debit or Credit' Becomes A Point-of-Fail, Kelly Jackson Higgins discusses how recent data breaches have spurred retailers, lawmakers and the banking industry to seriously rethink security options for card payment systems. She includes the following third-party observation:
First, merely adopting the chip cards without the requirement of PIN numbers, as the credit card companies had proposed, is a half-measure that will not make customer data and card transactions wholly secure. Yes, the chip is extremely difficult to counterfeit but without the second layer of cardholder authentication offered by the PIN, it does not solve for lost or stolen card fraud or Internet fraud.
Secondly, it’s important to note that the standard called EMV that the major card brands, Visa and MasterCard, are pushing for is actually their proprietary technology and opens the door for them to extend their already-powerful duopoly. Merchants are concerned that adopting EMV will allow the credit card companies to maintain their dominance in this technological arena and as a result prevent a competitive market from forming, perhaps one that moves beyond cards to customers using their mobile devices to make purchases.
No good can come from this kind of non-competitive market. We’ve seen proof of that with the credit-card companies’ exorbitant swipe fees. If the duopoly of MasterCard and Visa stymie competition in technology, too, in the long run it only ends up hurting both consumers and merchants.
"Banks have gone out of their way to make us [consumers] feel comfortable. They're just charging the retailers for this, but it's going to hurt the retail industry," says Avivah Litan, distinguished analyst with Gartner. "Maybe banks will now move on chip and PIN" sooner, she says.While it is true that retailers pay a disproportionate share of fraud costs and the reality of recent data breaches will goad banks and retailers both to make changes, we must be sure that they are the right kind of changes. The move to a computerized chip embedded in the card is not the complete solution to fraud in the United States.
First, merely adopting the chip cards without the requirement of PIN numbers, as the credit card companies had proposed, is a half-measure that will not make customer data and card transactions wholly secure. Yes, the chip is extremely difficult to counterfeit but without the second layer of cardholder authentication offered by the PIN, it does not solve for lost or stolen card fraud or Internet fraud.
Secondly, it’s important to note that the standard called EMV that the major card brands, Visa and MasterCard, are pushing for is actually their proprietary technology and opens the door for them to extend their already-powerful duopoly. Merchants are concerned that adopting EMV will allow the credit card companies to maintain their dominance in this technological arena and as a result prevent a competitive market from forming, perhaps one that moves beyond cards to customers using their mobile devices to make purchases.
No good can come from this kind of non-competitive market. We’ve seen proof of that with the credit-card companies’ exorbitant swipe fees. If the duopoly of MasterCard and Visa stymie competition in technology, too, in the long run it only ends up hurting both consumers and merchants.
Monday, February 3, 2014
Card Fraud More Common in United States than Europe
As more information about the recent rash of data thefts comes to light and additional breaches are discovered, it is becoming ever more apparent that the credit/debit payment system in the United States is broken. New statistics only bolster that reality.
Take for instance a recent Nilson Report, which showed that while the U.S. accounts for only 27% of the credit card transactions worldwide, it is in fact responsible for 47% of card fraud. Or a report from Aite Group and ACI Worldwide, which surveyed more than 5,000 consumers in 17 countries and found that the United States, along with Mexico, is more susceptible to fraud with 42% of respondents saying they have been victims of such fraud.
Why are these data breaches happening at a greater rate in the U.S. than say in Europe?
Simply put, it is because the United States continues to rely on an outdated magstripe payment card whose required signature authorization can be easily plagiarized and used to create a host of fraudulent cards. Most European countries, on the other hand, follow the EMV standard, which uses a microchip technology that offers consumers, merchants and banks much greater security.
But it will take several years for the EMV standard to be put into practice in the United States, as it requires banks to update their card systems. This promises to be a costly investment and banks no have motivation to make that investment because merchants bear the lion’s share of the consumer fraud costs.
In the meantime, American consumers remain sitting ducks as our credit and debit cards remain acutely vulnerable to criminals.
To read more about the Aite Group/ACI Worldwide survey, see the Forbes article here.
Take for instance a recent Nilson Report, which showed that while the U.S. accounts for only 27% of the credit card transactions worldwide, it is in fact responsible for 47% of card fraud. Or a report from Aite Group and ACI Worldwide, which surveyed more than 5,000 consumers in 17 countries and found that the United States, along with Mexico, is more susceptible to fraud with 42% of respondents saying they have been victims of such fraud.
Why are these data breaches happening at a greater rate in the U.S. than say in Europe?
Simply put, it is because the United States continues to rely on an outdated magstripe payment card whose required signature authorization can be easily plagiarized and used to create a host of fraudulent cards. Most European countries, on the other hand, follow the EMV standard, which uses a microchip technology that offers consumers, merchants and banks much greater security.
But it will take several years for the EMV standard to be put into practice in the United States, as it requires banks to update their card systems. This promises to be a costly investment and banks no have motivation to make that investment because merchants bear the lion’s share of the consumer fraud costs.
In the meantime, American consumers remain sitting ducks as our credit and debit cards remain acutely vulnerable to criminals.
To read more about the Aite Group/ACI Worldwide survey, see the Forbes article here.
Friday, January 31, 2014
EU Court Adviser Puts MasterCard in Its Place
MasterCard is doing everything in its power to fight EU regulator’s 2007 decision to limit the fees European retailers pay for processing credit and debit card transactions. Fortunately, it seems like nobody believes MasterCard’s claim that capping interchange fees is not beneficial to merchants and consumers. Earlier this week an adviser to European Commission said MasterCard’s appeal should be completely dismissed.
European retailers stood up against credit card giants: Visa and MasterCard and have been fighting for a fair and competitive payments system. However, MasterCard doesn’t want to let go of huge interchange fee profits. Limiting swipe fees to 0.2 percent for debit and 0.3 percent for credit translates to €6 billion a year in savings for retailers and consumers in Europe.
Bloomberg quoted the CEO of Europe’s biggest home improvement retailers, Kingfisher Plc:
The EU court should make a decision within next 6 months and it usually agrees with the advisers’ opinions. In this case, the advice is spot-on.
European retailers stood up against credit card giants: Visa and MasterCard and have been fighting for a fair and competitive payments system. However, MasterCard doesn’t want to let go of huge interchange fee profits. Limiting swipe fees to 0.2 percent for debit and 0.3 percent for credit translates to €6 billion a year in savings for retailers and consumers in Europe.
Bloomberg quoted the CEO of Europe’s biggest home improvement retailers, Kingfisher Plc:
“Stimulating competition in the payment services market and ensuring fair interchange fees will create capital to enable a range of investments to be made.”In U.S. transaction fee rates are even more overblown. They are 7 or 8 times higher! This reduces retailers profits significantly and forces them to either raise prices, which hurts consumers and limits their spending or prevents merchants from hiring new employees.
The EU court should make a decision within next 6 months and it usually agrees with the advisers’ opinions. In this case, the advice is spot-on.
Sunday, January 19, 2014
Outdated System Guarantees More Data Breaches
As the extent of the Target data breach continues to trickle out and new revelations of similar violations at other major retailers come to light, one thing is crystal clear: the antiquated U.S. payment system is broken and needs a major upgrade.
Credit cards remain one of the most fraud prone payment options in our wallets today. Why is this? It’s essentially because there is no financial incentive for the banks to improve a system that relies on 40-year old technology. Take for instance, the two largest credit card brands, Visa and MasterCard. They control 80% of the marketplace and as a result get to call all the shots when it comes to how consumers’ account information is protected and who pays for the fraud. Given that they pulled in $7.7 billion in combined after-tax profits in 2013 and rarely end up absorbing the losses from fraud, they are just not motivated to take on the costly expense to update the system.
It’s ironic that the United States lags so far behind the rest of the industrialized world given that we have long led the way when it comes to technological innovation. Nevertheless, we are one of only a few developed countries that still rely on a magnetic stripe to hold all the pertinent financial information needed to make a purchase by credit or debit card. This makes us a magnet for fraud.
Right now, the banks are content to sit back, enjoy their excessive profits and address the fraud after it has already happened. But data breaches, both large and small, will continue to occur and consumers and merchants will continue to pay the price until the banks make the proper investment and take a more pro-active role in preventing the fraud from occurring in the first place.
For a detailed analysis, see David Dayen’s article, “Your Credit Card Has a Dangerous Flaw That the Banks Refuse to Fix,” in The New Republic here.
Credit cards remain one of the most fraud prone payment options in our wallets today. Why is this? It’s essentially because there is no financial incentive for the banks to improve a system that relies on 40-year old technology. Take for instance, the two largest credit card brands, Visa and MasterCard. They control 80% of the marketplace and as a result get to call all the shots when it comes to how consumers’ account information is protected and who pays for the fraud. Given that they pulled in $7.7 billion in combined after-tax profits in 2013 and rarely end up absorbing the losses from fraud, they are just not motivated to take on the costly expense to update the system.
It’s ironic that the United States lags so far behind the rest of the industrialized world given that we have long led the way when it comes to technological innovation. Nevertheless, we are one of only a few developed countries that still rely on a magnetic stripe to hold all the pertinent financial information needed to make a purchase by credit or debit card. This makes us a magnet for fraud.
Right now, the banks are content to sit back, enjoy their excessive profits and address the fraud after it has already happened. But data breaches, both large and small, will continue to occur and consumers and merchants will continue to pay the price until the banks make the proper investment and take a more pro-active role in preventing the fraud from occurring in the first place.
For a detailed analysis, see David Dayen’s article, “Your Credit Card Has a Dangerous Flaw That the Banks Refuse to Fix,” in The New Republic here.
Tuesday, January 7, 2014
Swipe Fee Fight Goes On As Retailers Appeal Credit Card Settlement
The next chapter in the eight-year battle between the retail industry and Visa and MasterCard is set to unfold as the National Retail Federation (NRF) recently filed an appeal to the controversial antitrust lawsuit settlement covering credit card swipe fees. At the heart of the appeal is the fact that the deal simply won’t prevent these fees from continuing to rise at exponential rates in the future.
In December, a federal judge approved the proposed $5.7 billion settlement between retailers and the credit card giants. Merchants had brought the suit against Visa and MasterCard to fight the soaring cost of swipe fees, which drains $50 billion a year from the bottom line of retailers and consumers. Given that the major credit card companies together control 80 percent of the market, they continue to set these fees in a manner that amounts to price-fixing. Merchants, at no point, have ever been given an opportunity to negotiate these fees.
So, what is gained by the settlement? From the merchants perspective, not very much. Even with this settlement in place, the problems retailers face, which triggered the litigation to begin with, will remain. The decision offers nothing in terms of reforming the system or curbing the escalating costs of the fees, which have tripled in the past decade alone. In fact, the $5.7 billion settlement is a mere drop in the proverbial bucket for Visa and MasterCard as it represents less than three months of their swipe fee profits.
As Mallory Duncan, NRF’s Senior Vice President and General Counsel says,
“The only people pleased with this settlement are Visa and MasterCard, because it means they can continue collecting tens of billions of dollars in hidden fees, the class action lawyers who stand to collect half a billion dollars in fees without fixing the problem, and a lower court, which has cleared a time-consuming case off its docket, but has done a serious disservice to merchants and the public in the process.”
To read more, see here.
In December, a federal judge approved the proposed $5.7 billion settlement between retailers and the credit card giants. Merchants had brought the suit against Visa and MasterCard to fight the soaring cost of swipe fees, which drains $50 billion a year from the bottom line of retailers and consumers. Given that the major credit card companies together control 80 percent of the market, they continue to set these fees in a manner that amounts to price-fixing. Merchants, at no point, have ever been given an opportunity to negotiate these fees.
So, what is gained by the settlement? From the merchants perspective, not very much. Even with this settlement in place, the problems retailers face, which triggered the litigation to begin with, will remain. The decision offers nothing in terms of reforming the system or curbing the escalating costs of the fees, which have tripled in the past decade alone. In fact, the $5.7 billion settlement is a mere drop in the proverbial bucket for Visa and MasterCard as it represents less than three months of their swipe fee profits.
As Mallory Duncan, NRF’s Senior Vice President and General Counsel says,
“The only people pleased with this settlement are Visa and MasterCard, because it means they can continue collecting tens of billions of dollars in hidden fees, the class action lawyers who stand to collect half a billion dollars in fees without fixing the problem, and a lower court, which has cleared a time-consuming case off its docket, but has done a serious disservice to merchants and the public in the process.”
To read more, see here.
Monday, January 6, 2014
New Surcharge Rule Does Not Ease Swipe Fee Pain
This week, American Express reached a settlement agreement with businesses that will allow merchants to surcharge customers who pay with the company’s cards. While American Express is touting this as a “win” for merchants since it gives them the ability to lower their costs by adding a “checkout” fee, the settlement actually does precious little to address the root of the problem: the skyrocketing cost of the swipe fees themselves.
Right now, swipe fees cost merchants and consumers upwards of $50 billion a year. This new settlement does nothing to rein them in and doesn’t begin to address the secrecy in which they are set. Moreover, merchants will not be eager to tack on this fee and create a two-tier payment system in which customers paying by credit will be charged more than those paying with cash. The potential consumer backlash could drive customers away and as merchants scramble for business in this fragile economic environment, it’s hard to fathom that they would take such a big risk.
This settlement does not do anything to fix a payments market that is fundamentally broken. All it does is ensure that the status quo will remain in tact and merchants and consumers will continue to feel the pinch.
Below is a statement by the Merchants Payments Coalition in response to American Express' announcement.
“This agreement is a tragic mistake that will hurt merchants and their customers,” MPC Chairman and National Retail Federation Senior Vice President and General Counsel Mallory Duncan said. “The settlement does nothing to lower credit card swipe fees while making sure the fees will continue to be hidden from consumers and that the big credit card companies can continue to fix prices without competition. The result is that swipe fees will continue to be the fastest-growing expense for merchants and that consumers will keep paying overinflated fees without even knowing it.”
To read more about the settlement, read here.
Right now, swipe fees cost merchants and consumers upwards of $50 billion a year. This new settlement does nothing to rein them in and doesn’t begin to address the secrecy in which they are set. Moreover, merchants will not be eager to tack on this fee and create a two-tier payment system in which customers paying by credit will be charged more than those paying with cash. The potential consumer backlash could drive customers away and as merchants scramble for business in this fragile economic environment, it’s hard to fathom that they would take such a big risk.
This settlement does not do anything to fix a payments market that is fundamentally broken. All it does is ensure that the status quo will remain in tact and merchants and consumers will continue to feel the pinch.
Below is a statement by the Merchants Payments Coalition in response to American Express' announcement.
“This agreement is a tragic mistake that will hurt merchants and their customers,” MPC Chairman and National Retail Federation Senior Vice President and General Counsel Mallory Duncan said. “The settlement does nothing to lower credit card swipe fees while making sure the fees will continue to be hidden from consumers and that the big credit card companies can continue to fix prices without competition. The result is that swipe fees will continue to be the fastest-growing expense for merchants and that consumers will keep paying overinflated fees without even knowing it.”
To read more about the settlement, read here.
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