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Letter from the CEO: The Payments Bubble (MAG Quarterly- Volume Four, Issue Two)

By Mark Horwedel, CEO, Merchant Advisory Group 

June 2, 2016

Economic “bubbles” have been much in the news in recent years. There’s the Internet bubble, the mortgage bubble and now the student loan bubble. I’d like to suggest there is one more bubble which has yet to be called out, but is nevertheless pretty obvious to a handful of payments professionals who don’t practice the art of denial or are not paid to cover up the obvious symptoms. It’s the payments bubble.

Unlike other notable bubbles, the payments bubble is pretty much limited to the US. It is a result of the unmitigated greed of a payments industry bent on squeezing every last cent out of merchants and consumers. It is also the result of the laissez faire political and regulatory system that perversely treats the US card payment system as an example of the free market and essentially grants a free pass to those who step all over our antitrust laws.

The payments bubble has many attributes of traditional bubbles. The payments industry maintains its hold on merchants and its command of issuers with flimsy rules like honor all cards that were originally intended to keep merchants from discriminating against individual issuers, but have morphed into honor all products as the big banks have demanded more income from their card business. The big banks compete for cardholders by increasing rewards to cardholders while their actions perversely increase the cost of merchant goods and services to all customers, a fact that has not received enough attention from consumer advocates and politicians.

So many of you may be wondering, “what event or series of events might work to burst the bubble or slowly deflate it?”

Probably the first and most obvious development would be political, the result of Congressional action, litigation or more vigorous enforcement of the existing anti-trust statutes. None of these scenarios are beyond the realm of possibilities, especially since many of the most developed nations have already reigned in the card schemes. As an example, regulating interchange in EMEA to 20bp (debit) and 30bp (credit) as of December 2015 was the most recent move by the European Economic Zone.  The next regulation we will see is in June 2016 which requires increased transparency on the part of processors in their reporting.  The crescendo of complaints to politicians and regulator by merchants is just beginning as merchants feel the pain of chargebacks associated with the botched EMV migration and begin looking for political or legal remedies. 

Another scenario would have payments innovators gradually deflate the bubble by bringing more cost-effective payments solutions to the market. The innovators are much more fleet of foot than the payment networks which are burdened with costly and inflexible payments technology and the burden of keeping relevant thousands of technologically inept financial institutions which share their brands. One symptom of their ineptness is their insistence on retaining signature instead of moving to PINs. Truth is they just don’t want to overhaul their legacy systems. There’s way too much profit in the current system in which banks have no incentive to compete for merchant business. This works to cover up the inefficiency and the lack of innovation by the incumbent providers. Innovators see how unbelievably profitable these schemes are and want to feast at the same trough. They can easily undercut the banks and the networks on price, provide better, more up-to-date technology and still make a fortune at today’s prices. While the banking industry still has a monopoly on many of the existing payments systems, some like the ACH, when enhanced with payment guarantee and same day settlement are capable of replacing cards. 

The third scenario may have been hatched by the aforementioned botched EMV migration and the shift of fraud costs to unsuspecting merchants. Merchant CEOs who generally pay little attention to payments matters are shocked at the deluge of chargebacks and the high cost of EMV. They are demanding explanations and discovering for the first time how they and other merchants have been abused by the payments industry for years. One wonders if some of them will become so incensed that they will actually stop accepting all forms of payment and if a landslide could follow