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Letter from the CEO: Honor all Devices (MAG Quarterly- Volume Five, Issue Three)

Mark Horwedel headshot
By Mark Horwedel, CEO, Merchant Advisory Group

September 7, 2017

There are so many payments-related issues around today that it’s increasingly challenging to cover them all with a quarterly column. I’ve taken the liberty to touch on three of them in this issue.

Honor all Devices

The MAG has long warned its members about many pitfalls associated with the global card brands’ NFC initiatives, but none conjure up more concerns than their honor all devices/ wallets policies. These policies reflect a bold effort by the brands to extend their traditional honor all cards policies to fifth parties outside the historical four-party network model. As payment devices evolve from simple magnetic stripe cards to a range of devices equipped with powerful computer chips, the range of activities that might be conducted by chips that were originally conceived as simple payment processors grows exponentially. Sophisticated technology companies partnered with traditional banks or rent-a-BIN banks are poised to disintermediate merchants by using the data collected by the chip (ostensibly to fight fraud) to target customers with product offerings tailored to customers’ specific needs. Honor all wallets translates into a rule that bars merchants from the right to reject wallets from these fifth parties.

We have always said that some sophisticated technology companies already know who you are (name, phone number, email address) and where you are (where you live, work, shop) but if they found out what you actually bought then they could disintermediate merchants altogether.  A customer's regular purchases could be automatically fulfilled by a tech company by working with the manufacturers to ship directly to the customer's home.

Now, we understand that events playing out in China, while not directly associated with chip purchases, already illustrate the validity of our concerns.

As we understand it, when AliPay launched in China, they initially offered promos to merchants to get customers to shop and to get merchants to participate. These promos were funded by AliPay.  Late last year, AliPay stopped these merchant promos and switched to a product focus.  They started offering a variety of coupons on specific items ($1 off Tide, 50 cents off Kraft mayo, etc.) which were funded by AliPay as well.  When customers started redeeming the coupons, AliPay could identify their purchases by the coupons they used.  So now they know what products and what brands that customers are purchasing at which shops.  Now Alibaba is using that information to make targeted offers to fulfill the items customers most frequently purchase. Today, it’s safe to assume Chinese merchants have the right to reject a partner that might disintermediate them. Tomorrow, under honor all wallets, Chinese and U.S. merchants would have no choice.

Discounting and Surcharging

First off, let’s all agree that the distinction between the two is purely cosmetic.
Second, we understand surcharging is quite popular among online retailers in much of the world.
Further to that point, during our regular international merchants call, some of our European merchants informed us that while surcharging remains fairly rare among traditional brick and motor merchants, it is in fact the norm at online retailers. 

We’ve always known it’s much easier to execute surcharging or discounting for preferred forms of tender online, but we have seen little of it in the United States despite the fact that we are home to the highest costs of card acceptance in the world. Of course, some network rules still survive that preclude surcharging and discounting, but the two major four-party networks (Visa and MC) long ago entered into a consent decree which waived their previous objections to discounting. 

For merchants with co-branded cards, ACH options or other less expensive payments, discounting or surcharging might be one of the few means available to stem the ever-increasing costs associated with bankcard acceptance. We’ll have more on the subject soon as we try to clear up some of the confusion around this subject.

Banks really don’t want a free market!

Merchants gained an important win in their recent defense of the Durbin Amendment. The MAG joined with several of the Washington DC-based merchant trade groups to organize efforts which carried the day as lawmakers showed little interest in taking up a debate that forced them to choose between two important constituencies, merchants and the financial services industry. Nevertheless, our opponents remain undeterred from their goal of overturning Durbin by condemning price setting and operational mandates, something merchants have had to endure for years at the hands of global payment networks and the banks that stand behind them. The hypocrisy implicit in many of the banks’ arguments against Durbin show the banks really have no interest in anything resembling a free market. Some examples are:

  • Big banks band together in complete disregard for the free market and create a horizontal compact that sets supra-competitive interchange rates. They have neither the courage nor the competitive interest to engage in the kind of free market competition that merchants are accustomed to.
  • Bank opposition to new competition illustrates they really have no use for the “free” market. They came unglued a decade ago when one large merchant sought a bank charter. They sought protection from the same government they accuse of meddling in their business with Durbin-based regulation.
  • While merchants compete vigorously with each other for single digit profit margins, banks band together to soak merchants with hugely profitable fees for card programs. Consumers inevitably pay the price at the POS. Perhaps the Federal Reserve Board staff economists, who are supposed to work for all Americans, should study this market reality instead of conducting myopic studies that simply bolster the banks’ arguments that Durbin reduces the availability of free checking.
  • Bank pacts aimed at controlling faster payments doom the American economy to a substandard, closed market approach that will witness the US falling even further behind the rest of the world.
  • If it weren’t bad enough that banks themselves band together, bank-controlled card networks also band together at PCI and EMVco to develop policies that have shifted the burden of fraud and fraud mitigation from the banks to the merchants while disadvantaging competing domestic networks. 
  • And, let’s not forget that many of them probably would have been wiped out for good in the 2007 financial crisis that they created if it were not for a government bail-out!