28 Jul 2008
Financial Insights Perspective paper by Aaron McPherson, Bill Bradway, Dana Gould Marc DeCastro, Karen Massey Patricia McGinnis, Jeanne Capachin Robert Burbach, Abhishek Kumar
Background
Merchants of all sizes have been agitating in one way or another for lower interchange rates, particularly in the US, Canada, the EU, and Australia. In “Interchange: How Low Can It Go?” (See Related Research), the impact of regulatory intervention and legal attacks on interchange rates was examined. In many ways, Visa and MasterCard are victims of their own success. Card-based payment schemes continue to expand rapidly in many markets. Higher volumes are driven by convenience and reward programs. Card transaction costs have hurt merchant margins as card usage has increased. Consequently, merchants are open to lower cost alternatives. If one or more of these alternatives achieves significant market share (greater than 10%), it could pressure Visa and MasterCard to lower their interchange fees in order to preserve their share. However, experience has proven this a difficult hurdle to reach. Even if a low-cost alternative did manage to put downward pressure on interchange fees, there is controversy over who would benefit.
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