Want Out Of Interchange? It May Be A Question Of Loyalty Vs. FearWritten by Frank Hayes
Can anything actually reduce interchange? With the interchange settlement inching toward approval in New York federal court, and announcements expected next week from Google Wallet, Isis and maybe Apple, it’s easy to forget the underlying reality: Visa and MasterCard have their interchange stranglehold on retailers because interchange is the payment-card business model. Cutting interchange requires weaning customers off the card brands, and that means coming up with a widely used alternative to Visa and MasterCard. It’s as simple—and impossibly difficult—as that.
And it can’t be created the same way Visa and MasterCard were, because that’s now illegal. If the MCX retailers’ alliance wants to beat the card brands, that’s going to require some seriously new thinking—and it should probably start with loyalty.
Nothing else is going to move the needle significantly. The interchange settlement that lawyers for Visa, MasterCard, Kroger and Safeway will ask a federal judge in New York to approve on Friday (Oct. 19) won’t provide real relief, which is why Walmart, Target and most of the named plaintiffs in that class-action lawsuit are opposing it.
Then next Monday (Oct. 22), Google and Isis are both expected to make mobile-payments announcements: Isis to announce it is finally starting its trials in Salt Lake City and Austin; Google once again adjusting its payments system to try and get customers and retailers to use it. The next day, Apple has a new product announcement that probably involves either an undersized iPad or a scaled-down laptop or both, but it might also include something to prod its Passbook mobile wallet in the payments direction (it’s unlikely, but hope springs eternal in mobile payments).
Unfortunately, because Google Wallet and Isis are just new form factors for conventional payment cards, there’s no interchange relief there (and that would be a problem even if handing CRM data to Google isn’t a deal-killer for some retailers). And Apple is a complete unknown, except for its reputation for taking a big bite out of every transaction it handles.
In practice, every alternative to payment cards has the problem that those plastic cards are virtually everywhere, and no alternative can come close to such penetration. Remember, all through the 1960s the card brands mailed out 100 million unsolicited cards in the U.S. That’s how they primed the market. They stopped when that practice was outlawed in 1970. But by then, customers had been trained to love plastic—and merchants had been convinced to accept interchange.
Four decades later, both sides are addicted, so no retailer is going to simply walk away from the card brands. The everybody-signed-it-though-everybody-hates-it interchange settlement is just another demonstration of that. So is the talk about Congressional action, or a miraculous event involving Apple. Short of a retailer (or government) takeover of Visa and MasterCard, there’s going to be interchange, and chains are going to feel helpless about it.
That is, unless chains come up with an alternative themselves—something as common as payment cards but controlled by retailers and valued by customers. Only one thing fits into that category: loyalty programs.
Why not Apple? Not a big enough installed base. Why not Congress? Banks and card brands can point to the debit-card swipe fee cap, which has helped retailers but not the consumers it was targeted at. Why not another lawsuit? The lame settlement terms demonstrate how well that worked. No, this is going to have to be a do-it-yourself project.