A few weeks ago, when I read that ISIS was ditching Discover and deciding to tie up with Visa and MasterCard, something didn’t quite add up. After all, it was the company’s raison d’être to create a new payment network on top of its backers’ massive mobile networks. Besides, since ISIS had the backing of Verizon Wireless and other leading American mobile network operators, its mission to set up an alternative to the decade-long card networks operated by Visa, MasterCard and American Express didn’t seem so far-fetched.
When I read about the background to ISIS’ latest decision in this GigaOm post recently, I got the feeling that either American retailers are contradicting themselves or we haven’t heard the last of this story yet.
American retailers have been protesting vehemently to regulators (Dodd-Frank-Durbin et al) that the Visa/MC payment network oligopoly is exerting a very tight stranglehold over them. So tight that they’re unable to decline credit / debit cards from customers despite having to fork out ‘exorbitant’ fees. Known by various names like ‘merchant fee’, ‘merchant discount’ and ’swipe fee’, this fee is levied as a percentage of the retailer’s sale value. The exact percentage ranges from 1% to 3.5% depending upon the card type, merchant category, type of merchandise, mode of acceptance and a few other parameters. It doesn’t sound exorbitant to me but retailers from all over the world have gone to great lengths to dramatize the fees they pay for the privilege of accepting card payments. Home Depot says that its merchant fee exceeds its employee healthcare costs. India’s leading retail chain ‘Big Bazaar’ avers that its merchant fees are as much as 50% of profits it returns to its shareholders. Many others have used similarly sensational metrics to make their case in this rapidly unfolding drama.
So, when ISIS goes to them with an offer to set up a spanking new alternative payment network, do retailers give it a warm welcome? Are they overjoyed that someone has finally come to deliver them from the clutches of Visa and MasterCard?
No.
According to ISIS, retailers and merchants say they’re not interested. Yeah right, not interested.
Their stance sounds highly contradictory. It seems as though American retailers want to have their cake and eat it too. Unless ISIS
- Insisted that retailers had to break off their long-standing ties with Visa/MC if they wanted to join ISIS’ new payment network, or
- Quoted merchant fees that were higher than Visa/MC’s.
Something tells me it’s (2).
Mighty as it is, I doubt if ISIS was ever under the illusion that Visa/MC could be pushed out of the retail payment loop. My guess is, ISIS must’ve realized that it was a pipedream to establish a widespread payment network from scratch and operate it profitably at lower merchant fees compared to Visa and MasterCard who’ve been around the block for decades.
On a related note, the last couple of years have seen the launch of scores of alternative payment methods that are based on ACH, FPS, SVP, TELCO BILLING, and so on. I’m sure Gen Y Mobile Payments like Boku and Zong who charge merchant fees as high as 30% are an aberration, but I wonder how many alternative payments are around that are free for the customer / payer and cost less than Visa/MC for the merchant (Cash and checks don’t qualify!).