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Letter from the CEO: Fables, Fantasies and Fabrications ((MAG Quarterly- Volume Four, Issue Three)

By Mark Horwedel, CEO, Merchant Advisory Group 

September 1, 2016

The card business abounds with misinformation intended to obscure the fact that merchants are essentially paying for everything while assuring them that they are getting a good deal. The never-ending stream of propaganda from some of the networks is aggressively supported by the many hangers-on who are dependent upon the current paradigm to pay their bills. Some of their arguments and assertions are so nonsensical that they defy common sense. As examples, I would cite the recent “study” conducted by one consulting firm concluding that it would cost more to include PINs on card purchases than it would save on fraud costs, as well as network data that is intended to support their contention that lost and stolen fraud is gradually disappearing.  Others stretch the truth and are supported by erroneous data intended to suggest they are unarguable or unimpeachable.

Here are just a small sample of the myths, misconceptions:

  • Credit cards are less expensive for merchants than cash - Really? Maybe in the EU where merchants pay 30 bps for credit and 20 bps for debit, but sure as hell not in the US. And incidentally, who are you to tell us merchants what our costs are? 
  • Credit card acceptance drives incremental sales for merchants - Consumers have finite assets. Their assets are not increased when they are loaned money via credit cards to make purchases beyond their immediate means. Sooner or later, they have to pay back the loans. This suggests they may make purchases sooner than they otherwise would, but does not suggest their total purchases increase. In fact, one could argue their assets (and their buying power) are ultimately reduced since they have to allocate some of their finite assets to paying interest and fees on the debt associated with their cards.
  • Interchange and other costs of card acceptance don’t effect the price at the POS. Also, Durbin debit fee cost reductions were never passed through to consumers - I seem to recall from my Accounting 101 class something about cost of goods sold and how most businesses try to recover it and make a profit. Maybe some of the high-priced economists who contend that card acceptance costs are not factored into the prices customers pay at the POS skipped 101 and never learned how to calculate cost of goods sold? Are we to believe that the impact of Durbin debit fee reductions is unique among all costs since they alone don’t get included in calculation of the cost of goods sold?
  • The Durbin Amendment resulted in higher fees to some merchants. - Wrong, the Federal Reserve’s mishandling of the Durbin Amendment resulted in the networks’ increase of fees to small ticket merchants. Durbin intended to lower the cost of debit to around 4 cents, but the Fed increased the cost to 24 cents in order to insure the big banks wouldn’t take too big of a hit on their swipe fee profits and the networks opportunistically exploited the Fed’s failure to address small ticket sales by ramping up fees to small ticket merchants. 
  • The US EMV implementation is going well and has been highly successful. Also, merchants experience an ROI when they move to EMV. - OK, we must admit it is going very well for the global card brands since it further cemented their hold on the payments business in the US, resulted in a significant gain in their share of the debit card business, helped pave the way for NFC and enabled them to push almost all of the cost on merchants. It also went pretty well for the big banks who counted on liability shift to pay for their new EMV cards. It’s been horrible for merchants. Merchant ROI was never a part of the equation for the US EMV migration. It was a one of those phrases dreamed up by the networks to confuse outsiders by implying there was a potential upside in EMV for merchants.
  • Signatures are a valid means of fighting fraud. - Is there really a need to comment on this absurdity? However, the fact that signatures are the basis for a whole bunch of ridiculous chargebacks to merchants suggests they are a valid means for issuers to dump more fraud and bad debt on merchants than they otherwise could. Notably, chargebacks almost completely disappear when PINs are required.  Another tangential matter may be worth mentioning here – what is up with Visa no longer allowing CVV entry for hand-key transactions in April 2017?  Why would they stop a process that by most accounts is an effective means of fighting fraud?
  • PINs are obsolete since PINs represent “static data.”-  We haven’t heard this one much lately since the networks rely on static data with their new tokenization technology, but it was used a lot by at least one network as the primary reason why we should not require PINs when the US migrated to EMV. Unfortunately, for most of us, PINs represent the only viable solution available today to authenticate the cardholder at the POS or on-line. Until the networks come up with something better, they should stop debating the effectiveness of PIN and just admit the issuers didn’t want to spend the money to require PINs or, as some of us would say, “just shut up cause you got nuthin!”
  • Following all the card brand rules at the point of purchase will guarantee payment to the merchant. - Chargebacks come first to mind, especially those associated with liability shift. 20,000 pages of rules also helps insure that a merchant is likely violating some obscure provision of some self-contradictory term in some rule at any instant and with respect to any particular sale. One wonders if that was the whole intent of having 20,000 pages of rules in the first place?
  • PCI is focused on protecting us all from payment fraud and helps merchants. While at some point it may have been desirable for merchants to have all of the networks conform to a single set of rules for safeguarding against fraud, PCI has really enabled them to collectively force most of the costs on the merchants while saving themselves and their issuers from overhauling what by most accounts is a fraud-prone card product. If PCI was truly about protecting us all from fraud, wouldn’t PCI have required issuers to move to PINs or something better and wouldn’t PCI have required issuers to engage in end-to-end encryption?
  • Customers should be able to choose at the POS. - OK, if you truly believe in this high-sounding principle, I know a whole bunch of people, who, along with me, would choose to enter a PIN when presenting credit cards for payment. Most of us have experienced payment fraud and had our cards replaced on multiple occasions over the past few years. Almost always, the fraud never involved the use of a PIN. So, we’re sure you’re ready to give us a PIN on credit because we get to choose, right?
  • Forcing merchants to accept premium priced cards is a valid extension of honor all cards. - Honor All Cards was first envisioned as a relatively defensible proposition that assured that merchants would be required to accept Bank B’s cards if they already accept Bank A’s cards. There wasn’t much quarrel with this back at the inception of the card business when both cards cost the merchants 1.25% + 5 cents per purchase. But, today, Honor All Cards has morphed into Honor All Products and cost of acceptance has soared. The original justification for honor all cards has little bearing on the current reality.  I recall one conversation with network officials in which they assured my employer that only their most highly qualified cardholders would receive a new premium card product carrying a very high interchange rate.  A few weeks later, one of their biggest issuers converted most of their portfolio to the new product which effectively increased the cost to merchants by 50 percent.
  • Having 10,000+ banks all charge exactly the same interchange rates is not anti-competitive, but necessary to create an efficient market. - While this argument has always seemed counter-intuitive, it has proven itself to be totally untrue. That’s one reason why the cost of card acceptance has increased dramatically since the inception of the business. Another reason is interchange fees are completely hidden from customers. Operational efficiencies, improvements in technology and price transparency have all worked to drive down prices for other services, but have had no impact on the cost of card acceptance.
  • In a few years we can probably also add this one: “Fees paid to wallet providers will not increase the cost to merchants or consumers.”