RIP Payment Card Industry
Written by Todd L. MichaudTodd Michaud runs Power Thinking Media, which helps retailers and restaurants tackle the convergence of social, mobile and retail technologies. He spent nine years delivering technology platforms to more than 10,000 retail locations as VP of IT for Focus and Director of Retail Technology for Dunkin’ Brands.
August 2012 will go down in history as the beginning of the end for the traditional payment card industry. Discover and PayPal just teamed up to offer what could prove to be the ultimate demise of the biggest payment system monopoly: in-store payments. Without involving the POS providers.
PayPal’s Discover credit-card network deal will see PayPal integrated with Discover, which it will then push out to all merchants that accept Discover—assuming the acquirers don’t stop them. This is big news. Feeling violated by the costs of PCI compliance, merchants are loathe to spend any money on their POS technology, especially when it comes to payment systems. And although there has been a lot of news about the payment industry in the last month, noticeably absent in the media are the major POS players. On the surface, this announcement appears to remove that obstacle.
PayPal’s main value proposition is cheaper access to a customer’s money (in many cases, having the ability to use ACH transactions instead of the more expensive card processing). If PayPal does offer to reduce the cost of processing to the merchants, it gives itself a great chance of being not only adopted but marketed by merchants as a preferred payment method.
Discover brings the ability to light up more than 7 million locations without having to broker conversations with the major POS and payment device providers. It is also making a significant play to become the future processing platform for mobile transactions. If it will white label for PayPal, why not do the same for other payment platforms?
If I am Visa or MasterCard today, I am really concerned with this news. Years ago, the brands snuck into processing checking-account transactions with the invention of debit cards. They convinced everyone to pay inflated fees for these transactions to use the existing credit-card processing infrastructure. Interchange was already the biggest scam in the book, charging merchants extra fees to cover their “bad debt” while charging consumers the same thing through interest rates.
Merchants, pinching their pennies, made a poor deal. Then, just like a business being protected by the mob, merchants were further squeezed by the introduction of Payment Card Industry (PCI) compliance regulations. Merchants were told they had to pay extra for the protection (meeting PCI regulations), while giving no such assurances that the protection would cover them if they got in trouble. In fact, the entire system was set up to leave merchants holding the bag. The card brands were even brazen enough to get merchants to fund the loyalty programs of their issuing bank partners.
But that is about to change.
-Marc
August 23rd, 2012 at 10:02 am
My two cents: 2012 may be the year remembered as the tipping point in shift of power from bankers to retailers.
The beginning of the end of the payment oligopolists really started in 1999 when several large retailers finally got fed up with the twice-yearly increases in interchange and fees and started pushing back – hard. Walmart tossed the first major salvo when they sued and won a $3 billion settlement in 2003.
To all my friends on the banking and processing side of the business: Look at merchants not as an “inconvenience” between you and the cardholder, but as a client with growing choices to dis-intermediate you.
August 23rd, 2012 at 6:02 pm
Being that these are transactions going through the Discover network, won’t they still be subject to interchange rates and PCI-DSS requirements? And it looks like Visa’s announcement of their P2PE service will attempt to do much more to lock merchants into Visa while at the same time exempting them from much of the PCI-DSS requirements. http://investor.visa.com/phoenix.zhtml?c=215693&p=irol-newsArticle&ID=1727178&highlight=
August 23rd, 2012 at 6:27 pm
As for PCI, yes, in theory. Interchange will apply, but at what rate? Many questions remain. For example, PayPal’s Don Kingsborough was asked Wed. about whether these transactions would be considered card-present or card not present. That’s a very interesting question as the card is not really present. When asked directly, he said “it depends on the kinds of transactions. More to come about this as we get closer to the launch in the second quarter.” Not especially comforting, but it does signal that interchange issues are far from solidified at this point.
August 24th, 2012 at 12:25 pm
Todd,I agree with your views 100. It will not happen over night but the cat is out of the bag. The infrastructure did not exist 20 years ago so the fees justified the risk. Today, the merchants can use the same infrastructure and also now have closed loop payments well tested.
At a very high level I think we are going to see two types of payment groups: 1)ubiquitous, Private, Open loop and 2) relationship, value add, closed loop. Visa like vs MCX like. Some consumers will want privacy and universal use, while others will want a relationship with the merchants (and receive extra value). They will likely do both. Mobile will turbo charge the the second group. So if the MCX like offers are reloaded via the consumers bank then the credit card players of today are headed for a huge volume haircut.
August 24th, 2012 at 6:28 pm
Todd, I empathize with you and I’m in the processing business. But, the end of the payment brand monopoly is just a dream, or for many a nightmare. With this announcement, PayPal has simply joined the payment brand club, which includes Visa, MasterCard, Amex, and Discover. In fact the winner here is Discover as PayPal cards will have Discover numbers and of course will be subject to Discover interchange. It does not matter who the processor is, or what the platform is, whatever payment brand logo is on the card, that is the network it must pass through to be processed. Which means there will always be interchange assessed on the transaction, period. I certainly agree with you on PCI compliance and security, merchants should not have to pay for security, it should be part of their processing agreement. However, the payment brands have a near universal monopoly on payments and it won’t be changing in my lifetime or yours.
August 26th, 2012 at 9:03 am
If there is enough pressure on visa/mastercard, one would think they would react by lowering fees. Let’s face it, those cards are going to be around a while. Looking back to 2001, cc processing fees were .2 of sales and now stands to reach .8 of sales, as that continues to rise, you will see opportunities to make money and to create competition amongst processing fees, which should in turn reduce the cost to the retailer. Where does that pressure come from, is it discover/paypal, or is it the retailer? Think of all the money spent on transaction fees in the grocery industry, roughly $5 to $6 billion a year, there is room for grocers to put the pressure on the cc companies, but it will take communication and promotion by the retailer to the consumer.
August 28th, 2012 at 10:36 am
Evan,
Why in God’s name don’t you have a “tweet this” option for your articles? Or at least summaries… It would make a big difference.
You must be heard!
Hope all is well.
Cheers,
Rich
August 28th, 2012 at 1:44 pm
We used to but it was slowing down the site–and sometimes crashing the site–too often.
August 29th, 2012 at 1:28 pm
I agree with Todd on many of his insightful points and predictions of the future.
However, in at least one comment PayPal is riding on the Discover network.
This may be only a TEMPORARY arrangement.
Combined with the news of the MCX network these two concepts signal a turning point in payment processing and I am confident that others will surface as the market / perception matures.
I’ve always seen PCI compliance as only a stop-gap to plug holes in the insecure and some say “broken” credit card transaction processes we’re all required to use.
There will be a dilution of efforts as many proposed products and standards come online, only now available due to the advancement of communications and technology.
As technology quickly and ultimately evolves clear “winners” will rise to the top for the benefit of merchant and consumer alike.
Interesting times!