Maybe you've seen the Protect Our Points campaign funded by the airline and credit card industries. It's an effort to block passage of the bipartisan Durbin-Marshall Credit Card Competition Act, a bill that promises to lower costs for consumers by bringing competition to credit card processing fees.
Will the bill really kill your loyalty points? And how would it affect you? I asked Doug Kantor, general counsel of the National Association of Convenience Stores, which supports the bill, for his perspective. Here's our interview:
Most consumers don't understand what happens when they use their credit card to buy something. They just swipe their card and then receive rewards. Can you explain what is going on behind the scenes, and how it affects consumers and merchants?
When a customer uses a credit card, the transaction gets transmitted over networks like Visa and MasterCard to the bank that issued the card for approval and processing. Then it comes back to the merchant with either an OK or a rejection.
This whole process takes seconds, and it’s a far cry from the old days, when cards went through a “knuckle buster” machine — if you’re old enough to remember those. I know I am. Back then, pieces of carbon paper had to be flown back and forth across the country.
You'd think that as the technology improves, costs would come down. But have they?
No. Even though the process has become more automated and cheaper for the card networks and banks, they are demanding more and more money to do the same thing. They currently charge merchants between 2% and 4% of the transaction every time a card is used. That’s anywhere from $2 to $4 out of every $100 spent, even though it costs them only pennies regardless of the amount.
That adds up quickly, and swipe fees are now most merchants’ highest operating cost after labor. It’s far too much to absorb, so credit and debit card swipe fees drive up the prices merchants have to charge by over $1,000 a year for the average family.
I don’t know about you, but I consider that a lot of money. And it’s a huge burden for families out there struggling to make ends meet.
Can you give me a sense of how much credit card swipe fees have increased in recent years?
Credit card swipe fees are going up at a dizzying rate. Visa and MasterCard swipe fees have more than tripled since 2010 and are up 50% just since the pandemic. That’s because the card networks keep raising the rates charged to merchants and also because they make their “prices” a percentage of the transaction amount.
Since the fees are a percentage of the transaction, they go up automatically when prices go up. That makes them a multiplier for inflation. And by taking a percentage rather than charging a set fee, it’s like the credit card industry has forced its way into being an unwanted partner in every Main Street business. Except they take a cut of the gross. Even business owners only get to take profits after expenses are paid.
How much money are we talking about?
If you include all brands of credit cards plus debit cards, swipe fees soared $22 billion to over $160 billion last year. To put that in perspective, revenues for the entire National Football League were $19 billion. That’s pretty breathtaking.
The bottom line is that fees are going up so high and so fast because the market is broken. Visa and MasterCard set the banks’ prices. All the banks agree that they will charge merchants whatever Visa and MasterCard say – which means they don’t compete on price at all.
Why are Americans paying more for swipe fees than almost elsewhere in the world?
Other governments around the world have stepped in when swipe fees have gotten out of control. The European Union limits credit card swipe fees to 0.3% of the transaction, and everything works fine. Credit cards are widely available in Europe, rewards are still offered, and banks still make a profit. We’re not asking for a cap in the United States, just competition like small businesses compete every day.
There's been a lot of discussion about the effect of the Credit Card Competition Act on loyalty programs. Will this law really kill credit card rewards?
Absolutely not. This is a scare tactic banks and card companies have used every time swipe fees have been regulated around the world and rewards haven’t gone away anywhere. It has even been fact-checked by Verify.com as completely false.
If you watch TV commercials, you know rewards are banks’ top marketing tool to get you to take a Visa or MasterCard from one bank versus another. Get the Capital One card. Get the Chase Sapphire card. There’s no way they’re going to give that up.
So when people say "save the points," they really don't understand how loyalty programs work?
Yes. Rewards are determined by the bank that issues a card, not the network that processes the transaction. So routing transactions over a different network has nothing to do with what rewards the customer receives.
Banks will see less swipe fee revenue. But there’s an independent payments consulting firm called CMSPI with a bunch of economists who’ve looked at this very closely. They say the bill would reduce rewards by less than 1/10th of 1% at most. And they say bank profits on swipe fees are so high that they could easily make up the difference, meaning rewards aren’t going anywhere. And there are multiple other studies and analysis pieces that agree.
I'm curious about the critics of the Credit Card Competition Act. I've seen a lot of loyalty program bloggers come out against the new law. What would they gain by defeating this bill?
The credit card bloggers pretend to be independent analysts or objective experts, but the truth is that they are paid spokespeople for the card industry. If you look at the advertising disclosures on their websites, you’ll see lines like “we are compensated by our partners,” and that means the banks and card companies. They get a fee every time someone who visits their website clicks through and gets a card they’ve recommended.
So they’re going to say whatever the card companies want them to say, whether it’s true or not. And drumming up a manufactured scare over rewards drives consumers to their websites so they can peddle more cards and make more fees.
If this bill passes, what do you think will happen to credit card rewards?
Like I said earlier, rewards aren’t going anywhere. Merchants offer loyalty and rewards programs even though they have a profit margin averaging under 2.5%. Big banks’ average profit is around 27%, and Visa and MasterCard make around 45% to 50%. So they have plenty of revenue to cover rewards even if swipe fees are reduced. Banks have the highest profit margins of any industry in the United States. Any change in rewards will be tiny – less than 1/10th of 1% – and no one will notice at all.
I want to turn to the real problem, which is competition. It's been said that Visa and MasterCard have a duopoly. Can you explain what that means? How does that affect consumers?
Visa and MasterCard together control more than 80% of the credit card market, and they use that market dominance to block competition. Nobody else comes close to the control they have. Amex is about 15% of the market, and Discover is about 3%. Venmo and things like that don’t even register.
They actually have more control of the credit card market than OPEC has of the crude oil market. And they engage in cartel pricing like OPEC. They each centrally set the swipe fees that all banks that issue cards under their brands charge merchants to process transactions. So, Visa and MasterCard make the entire banking industry into unified blocks of pricing. That’s the duopoly and the problem Main Street faces. Banks don’t compete at all over swipe fee prices.
But from what I've read, the networks actually try to keep competitors out of the market. Can you explain how that works?
Visa and MasterCard restrict processing to their own networks even though there are other networks that could do the job for less and with better security. That means those other networks don’t even get a chance to show what they could do. This level of control means Visa and MasterCard can set whatever fees they like and raise them whenever they want. Like I said earlier, these fees are too high for merchants to absorb, especially for small merchants, so they drive up prices for consumers.
It's not just merchants who are suffering, right?
Frankly, low-income consumers get the worst treatment in all of this. They pay that extra $1,000 per family in swipe fees, and they are more likely to carry a balance and pay the banks huge interest rates of 25% to 30%.
The Wall Street banks try to pretend that all their money comes from merchants and they would be poor without it, but they collect more than $100 billion from consumers in interest charges each year. They keep taking more from everyone year after year.
Critics say this bill would harm credit card security. Is that a risk?
It's totally the opposite. Credit card security would actually improve dramatically under the legislation. Competition among businesses is never just about price. It leads to better quality and service, too. There is no doubt that would happen here and improve security. Today, without competition, Visa and MasterCard have no real motivation to improve security. If they had to compete, they would have a reason to invest in innovations of all kinds.
How would that work?
The competing networks like NYCE, Star and Shazam that would be enabled under the bill are the same ones the banks themselves have trusted for decades to process billions of dollars in ATM and debit card transactions. In fact, Federal Reserve data shows that the fraud rates on those competing networks are far lower than the fraud rates on Visa and MasterCard. That shows definitively that security would be better with competition. They have one-eighth the fraud rate of Visa and MasterCard’s networks.There is also a track record of competition leading to improvements in security. We saw that after two networks were required on debit cards a dozen years ago. Innovations like encryption spread throughout the industry because all those networks needed to compete with each other.
The bill also would close a glaring security loophole by banning foreign-controlled networks like China UnionPay. Right now, nothing in federal law would stop banks from using China UnionPay on their cards. This bill would keep that from happening.
How would merchants benefit from this law?
The Credit Card Competition Act is projected to save merchants and their customers at least $15 billion a year.
Retail in the United States is very price-competitive. Multiple studies have shown that 70% of merchant savings goes directly into keeping prices lower than they would have been. After reforms made debit cards cheaper, merchants kept prices down and shielded customers from the majority of product cost increases they had over the next few years. It amounted to billions of additional dollars in consumers’ pockets.
And how about consumers?
More money in consumers’ pockets means more spending. Consumer spending drives the American economy and, in turn, drives job creation. It’s a virtuous cycle that takes place anytime cost can be taken out of the system across the board.
The whole point of having a monetary system in the first place rather than just trading, say, goats for chickens is to make it cheaper and more efficient for people to buy things. The Federal Reserve outlawed exchange fees on checks a century ago, requiring that banks cash checks for 100 cents on the dollar rather than taking a slice like swipe fees. They did that because it makes the entire economy more efficient when costs are taken out of each transaction.
Credit cards have become so expensive that in many countries, businesses are ditching them in favor of more efficient electronic payment systems. You can see that in places like India and South Africa. So, when we talk about reform, it seems this is just the first step toward a better payment method. Is the Credit Card Competition Act a stopgap solution?
Innovation would be great for everyone. As I said, more efficient payments benefit economic activity across the country. Unfortunately, the duopoly we have in the United States has held back innovation. You don’t need to innovate in a market you control. Much of the world has leaped past us, with more mobile payments and digital transactions. Our Federal Reserve is late to the game in looking at things like a digital currency.
Competition helps to bring about technological innovation. That happened with telecommunications in the 1990s. Having competition on long-distance service led not only to dramatically lower prices but also to innovations like friends and family calling, which had never existed before. Those innovations set the table for the tremendous new technologies that make young readers wonder what “long distance” is and why we’re talking about it. The Credit Card Competition Act is very similar to the structure of long-distance competition in the 1996 Telecommunications Act.
It would be great if credit card reform eventually became a moot point, but that day is not close in the United States. Consumer behavior is deeply ingrained, and we can’t afford to have tens of billions of dollars taken out of the economy each year while waiting for technological innovations. We need increased efficiency and economic activity now. With the help of some competition, we may be able to get there faster.
"loyalty" - Google News
November 25, 2023 at 08:41PM
https://ift.tt/sISt53N
Loyalty Points Don’t Need Protection, But Here’s What Does, Say Merchants - Forbes
"loyalty" - Google News
https://ift.tt/qbVlkZB
https://ift.tt/xJjUH2M
Bagikan Berita Ini
0 Response to "Loyalty Points Don’t Need Protection, But Here’s What Does, Say Merchants - Forbes"
Post a Comment