Monday, July 16, 2012

It Isn't Yet Clear How Visa-MasterCard Settlement Affects Mobile Payments

Though it is not a specific issue in the developing mobile payments business, historically hostile retailer relationships with credit card issuers continue to underpin retailer interest in rival methods of processing payments.

The big hope, of course, is that new mobile payment systems will allow retailers to process payments at lower cost than traditionally has been the case. To be sure, friction between participants in any ecosystem can get testy when one participant's revenue stream is another participant's cost.

Relationships between video subscription providers and the programming networks provide one clear example. But that also is the case in the retail payments business. A revenue stream for an issuing bank and a payment network is a direct cost to a merchant. And those costs might be changing.

Visa, MasterCard and their issuing partners have reached a legal settlement with merchants regarding interchange fees (fees charged by issuing banks for use of a credit card), and the implications for mobile payments are not yet completely clear.

Nor are the legal challenges entirely over. The National Association of Convenience Stores, for example, seems intent on continuing the fight against the settlement, even though plaintiffs and Visa and MasterCard have agreed to a settlement.

The lawsuit by merchants claimed Visa and MasterCard were in collusion to keep those rates higher than would otherwise be the case.

To settle the suit, merchants will be compensated in three ways. First, Visa, MasterCard and their issuing partners will make a $6.05 billion cash payment to merchants to compensate them for previous interchange charges.

Second, Visa and MasterCard will lower card acceptance fees by 10 basis points for a period of eight months, providing $1.2 billion in additional relief to merchants.

The third part of the settlement may have the largest impact on consumers' day-to-day shopping experiences, some think. Merchants will now be permitted to charge higher prices on transactions paid for with a credit card, a practice that had been prohibited by the networks' earlier terms.

The mobile payments business could be affected in a number of ways. In most cases, mobile payment transactions are based on payment of such fees. For consumers, there are few immediate effects, since the fees are paid by retailers, not end users directly (though the total cost of operating a retail outlet, including such fees, is built into retail prices).

Lower fees will reduce the mobile payments revenue opportunity, and also make harder the task of creating a value proposition that is easy to understand. Lower revenue might also reduce the incentive for issuing banks, and the payment networks, to spend so much on mobile payment systems.

On the other hand, should the uncertainty be cleared up, it also is possible issuing banks and payment networks could move with more assurance on mobile payments, since they would have greater understanding of the revenue part of the operations.

Less revenue from interchange also will continue to spur thinking about other ways revenue can be earned, and that should help mobile wallet efforts, which are expected to rely on loyalty programs, advertising and promotion revenue streams.

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