Friday, June 24, 2005

Round 2: Merchants vs. Card Associations

Today another LLP filed another big case against VISA and MasterCard over interchange. This times its not big name merchants but smaller regional merchants that have been gathered up by a firm in Minneapolis that is leading the charge against the two associations. Much like Walmart these smaller merchants will pass the savings along to the consumer, because we all know that merchants are in operation to save the consumers.

I believe the core problem with Interchange is that for so long its been a hidden secret that few knew and even fewer understood. Every merchant think there is no need to compensate the card issuer for the risk he carries by delivering fund to the merchant at the end of the day while carrying an IOU signed by the card holder for 21 days. The merchants do not take on the cost of card issuance, management, billing, risk processing and customer service, so to them its just plastic that should be cheaper to accept.

If they are all losing money on accepting credit card they should try not accepting it. The fact of the matter is that the merchants know they see a lift in ticket size with credit cards. They cannot afford to not accept credit cards, they just want to do it without paying their share into the 4 party system.

The fact of the matter is without the associations rules like "honor all cards" and "no surcharge" the merchants will be raking in $.50 per transaction on top of what they are charging for good as cost of doing business. Only way for the consumer and merchants to really understand the value that cards brings is to understand the pricing models that support the credit card business.

Associations are taking steps to edcuate and bring transparency to the issue, Visa has this primer on Interchange available on their site, a good start that shows that its not a secret and the associations are willing to show how the system works.