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Letter from the CEO: Cooperation is the Key to Changing Payments (MAG Quarterly- Volume Six, Issue Three)

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

September 6, 2018

Merchants often ask what they can do to lower their cost of payment card acceptance. The less initiated naturally presume that the card market behaves like other markets where competitors aggressively compete with one another for their business. Unfortunately, most merchants quickly discover competition for their business among card issuers and networks is non-existent. Certainly, competition among acquirers, POS hardware and software providers, fraud deterrent technology vendors and others is robust, but there is no competition for their business by the networks and the card-issuers that are responsible for the biggest share of the costs related to payment card acceptance.

It has been suggested merchants employ a multi-pronged strategic approach to lower their cost of acceptance. Some of the strategies consist of negotiation, cooperation, competition, legislation, litigation and limiting or differentiating various types of payment acceptance. However, few of these strategies constitute realistic alternatives for most merchants. Most strategies address past grievances and abuses but fail to provide permanent change by restructuring payment systems designed to promote bank interests at the expense of merchants.

History shows cooperation was the means by which banks seized the upper hand in payments over merchants in the first place. Bank cooperation manifested itself in the formation of shared payment networks in which the networks rather than the banks set default interchange fees effectively precluding any form of competition between banks for merchants’ business. Over the years, bank cooperation expanded by developing and controlling many of the other governing bodies associated with the payments business, including NACHA, PCI and, most recently, EMVCo. Today, while merchants either directly or indirectly pay for the payment card business, they have almost no say in the payment system rules that directly affect their business and profitability.

In contrast to banks, merchants are highly competitive with one another. Until fairly recently, most merchants were unwilling to even meet and share best practices around payment acceptance. Sharing best practices has created an element of trust between merchants, which can serve as the foundation for future cooperation. While cooperation can take many forms, truly substantive change in the present model will not be realized until merchants find ways to cooperate more effectively with one another, as well as with payment disruptors. The competitive nature of merchants will never change as it relates to selling merchandise or providing services, however, merchants have an opportunity to cooperate in ways that will drive efficiency and ultimately lower prices and improve services for their customers. Transaction processing should be akin to a utility that provides all merchants with a low cost, efficient, and secure way to receive payments from their customers.

The opportunity to make substantive change in the broken payments market continues to improve since consumer demands for more convenient and faster ways to shop and pay are unrelenting. The banking industry is failing to meet these demands and instead has focused its efforts on maintaining the status quo. Merchants, fintech companies, and perhaps even a few maverick banks recognize the value in cooperating to take advantage of the consumers’ new demands and the inability of many of the incumbent payments stakeholders to change with the times. Most merchants looking for ways to lower their cost of payment card acceptance still have relatively few realistic opportunities; however, we may be on the cusp of a revolution propelled by cooperation.