Visa and Mastercard have significant dominance in the attractive business of payment processing. Aided by secular trends of moving from cash to plastic, both companies have seen rapid growth in their businesses. In addition, both companies have continued to invest in technology to make it easier, more secure and less expensive to make transactions. The question is, "who loses?"
Consumers have never been happier with their plastic card options and continue to utilize them. Online options would be impossible with a cash-centric model. Further, the reforms after the Great Recession of 2008 did provide increased transparency on the fees and costs of using a credit card. Rarely are their complaints voiced. However, merchants are much different.
In a striking parallel to what I was discussing on the Netflix post, current technologies seem to favor the consumer while putting increased pressure on the suppliers. Merchants naturally chafe at paying 2% of their revenues out to the card costs while supplying goods, products and services in a world of decreasing profit margins. The internet provides increased price comparison and bottom line margins reflect this with the continuing drum beat of closed retailers.
Most networks beyond those of Visa and Mastercard are called PIN debit networks. When consumers shop in stores and type in their PIN at checkout, those transactions generally travel over a PIN network. These PIN networks charge lower fees, but are obviously not used much when consumers are hesitant to touch anything to type in a PIN. As a result, merchants are seeing increased routing of transactions over the Visa and Mastercard networks.
The merchants are arguing that the dominance of Visa and Mastercard means that the PIN networks hardly get used. Visa and Mastercard argue that they have invested in superior technology and deserve the higher transaction volumes and revenues they generate. Both arguments are valid and, to me, point to what is happening in industry after industry.
The participants with scale are able to invest in rapidly developing technologies in such a way that new competitors with lower cost structures for suppliers are unable to compete. With the consumer winning, it seems unlikely that current laws will act to help suppliers at the expense of consumers. So what kind of change could emerge? Could we see a movement towards treating these "winner take all" companies as a new kind of utility? If so, how would costs, benefits and returns on capital be regulated?
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