3 ms·

What's hypothetically supposed to happen is the payment vendors compete with eachother for traffic, and businesses negotiate deals and use the ones that give a

by ip26 8y ago

What's hypothetically supposed to happen is the payment vendors compete with eachother for traffic, and businesses negotiate deals and use the ones that give a good deal. Whether it's actually working that way in practice, of course, is a valid question.

AnthonyMouse 8y ago
The problem is network effects. If you accept Visa or Mastercard then you lose business, because many customers have only one or the other. So you need both, which means you can't play them off each other for a better deal and they aren't actually competing with each other. Combine this with contract terms in many places preventing merchants from passing on fees and it gets even worse, because card networks can gain customers and increase their network size by offering rewards and then use the network effect to raise fees. If the merchant can't charge more to customers whose card network charges them higher fees, the cardholder has the incentive to use the card with the highest rewards (and thus the highest fees), so you get a ratchet of increasing processing fees despite an overall trend of falling underlying processing costs due to automation.
- ip26 8y ago
  Speaking purely hypothetically, it's easy for a customer to carry both a Visa & MC, so if stores more frequently took only one or the other, customers would respond accordingly. Like they already do with AmEx, or when traveling internationally (where MC has a big leg up).
  - AnthonyMouse 8y ago
    But that's chicken and egg. Collective action problem. You can't stop accepting one or the other until the large majority of customers carry both, which they won't do while most vendors continue to accept both thereby allowing the cardholder to only need one.
    - CardFellow 8y ago
      True, although Visa card circulation far eclipses MC, so you could take the gamble that they'll have a Visa. Last I checked, Visa actually had more cards in circulation than all three of the other major brands combined. Slightly old info, but: SEC filings for end of 2016 had Visa circulation at 335 million, MC at 200 million, Discover at 51.4 and Amex at 47.5. https://wallethub.com/edu/market-share-by-credit-card-network/25531/ https://wallethub.com/edu/market-share-by-credit-card-networ... Nilson report 2016 card usage by volume has Visa at $1.549 trillion, with Amex at $0.695 trillion, Mastercard at $0.693 trillion. https://www.valuepenguin.com/largest-credit-card-issuers https://www.valuepenguin.com/largest-credit-card-issuers Forbes has some charts with market share info. https://www.forbes.com/sites/greatspeculations/2017/09/07/visa-tightens-grip-on-u-s-credit-card-industry-with-market-share-of-nearly-53/#6c5cd41e5112 https://www.forbes.com/sites/greatspeculations/2017/09/07/vi...
      - AnthonyMouse 8y ago
        The problem is it's not a gamble, it's a percentage. Even if 75% of your customers have a Visa, then 25% of them won't and you risk losing that amount of business by not taking what they do have. Moreover, that still wouldn't give you competition, because then what incentive does Visa have to give you a good rate if they're the only network you could plausibly attempt exclusivity with? It's like trying to solve a lack of competition by creating a monopoly.
- CardFellow 8y ago
  I agree that there isn't much of a way to get lower interchange fees, but many, many businesses overpay at the processor level, where there IS a way to get lower total costs. >contract terms in many places preventing merchants from passing on fees a This is not a thing anymore, the card brands allow surcharging. It's prohibited by state law in something like 7 states, but those are rapidly losing court battles about it.
- jzl 8y ago
  Unless if you're Costco. https://www.fool.com/investing/2017/06/20/how-did-costcos-credit-card-switch-turn-out.aspx https://www.fool.com/investing/2017/06/20/how-did-costcos-cr...
  - theshortofit 8y ago
    I don't know if its true or not but heard that Costco with this new deal with Visa is only paying a flat 40bps in interchange cost. Now that's a deal!!

by ip26 8y ago

AnthonyMouse 8y ago

The problem is network effects. If you accept Visa or Mastercard then you lose business, because many customers have only one or the other. So you need both, which means you can't play them off each other for a better deal and they aren't actually competing with each other. Combine this with contract terms in many places preventing merchants from passing on fees and it gets even worse, because card networks can gain customers and increase their network size by offering rewards and then use the network effect to raise fees. If the merchant can't charge more to customers whose card network charges them higher fees, the cardholder has the incentive to use the card with the highest rewards (and thus the highest fees), so you get a ratchet of increasing processing fees despite an overall trend of falling underlying processing costs due to automation.

ip26 8y ago
Speaking purely hypothetically, it's easy for a customer to carry both a Visa & MC, so if stores more frequently took only one or the other, customers would respond accordingly. Like they already do with AmEx, or when traveling internationally (where MC has a big leg up).
- AnthonyMouse 8y ago
  But that's chicken and egg. Collective action problem. You can't stop accepting one or the other until the large majority of customers carry both, which they won't do while most vendors continue to accept both thereby allowing the cardholder to only need one.
  - CardFellow 8y ago
    True, although Visa card circulation far eclipses MC, so you could take the gamble that they'll have a Visa. Last I checked, Visa actually had more cards in circulation than all three of the other major brands combined. Slightly old info, but: SEC filings for end of 2016 had Visa circulation at 335 million, MC at 200 million, Discover at 51.4 and Amex at 47.5. https://wallethub.com/edu/market-share-by-credit-card-network/25531/ https://wallethub.com/edu/market-share-by-credit-card-networ... Nilson report 2016 card usage by volume has Visa at $1.549 trillion, with Amex at $0.695 trillion, Mastercard at $0.693 trillion. https://www.valuepenguin.com/largest-credit-card-issuers https://www.valuepenguin.com/largest-credit-card-issuers Forbes has some charts with market share info. https://www.forbes.com/sites/greatspeculations/2017/09/07/visa-tightens-grip-on-u-s-credit-card-industry-with-market-share-of-nearly-53/#6c5cd41e5112 https://www.forbes.com/sites/greatspeculations/2017/09/07/vi...
    - AnthonyMouse 8y ago
      The problem is it's not a gamble, it's a percentage. Even if 75% of your customers have a Visa, then 25% of them won't and you risk losing that amount of business by not taking what they do have. Moreover, that still wouldn't give you competition, because then what incentive does Visa have to give you a good rate if they're the only network you could plausibly attempt exclusivity with? It's like trying to solve a lack of competition by creating a monopoly.
CardFellow 8y ago
I agree that there isn't much of a way to get lower interchange fees, but many, many businesses overpay at the processor level, where there IS a way to get lower total costs. >contract terms in many places preventing merchants from passing on fees a This is not a thing anymore, the card brands allow surcharging. It's prohibited by state law in something like 7 states, but those are rapidly losing court battles about it.
jzl 8y ago
Unless if you're Costco. https://www.fool.com/investing/2017/06/20/how-did-costcos-credit-card-switch-turn-out.aspx https://www.fool.com/investing/2017/06/20/how-did-costcos-cr...
- theshortofit 8y ago
  I don't know if its true or not but heard that Costco with this new deal with Visa is only paying a flat 40bps in interchange cost. Now that's a deal!!