Alternative payment systems
This endless war between the credit card companies and retailers could open the door for alternative payment processors. In an earlier article, I highlighted Google Inc (NASDAQ:GOOG) and eBay Inc (NASDAQ:EBAY)’s threat to the banking industry and credit card companies. Both Google and eBay have released their own plastic cards, which synchronize to their respective online wallets, Google Wallet and PayPal. These cards are now accepted at a rising number of brick-and-mortar retailers, and are becoming an increasingly popular method for online payments.
Google Wallet charges merchants 1.9% for purchases over $9.68, and 5.0% for lower purchases. Therefore, if merchants exclusively sell products that cost more than $10, the Google Wallet and its physical cards could be a more economical choice than Visa Inc (NYSE:V), MasterVard or American Express. This is also a considerably simpler payment scale than the 1.9% to 2.9% fees it charged retailers (based on monthly sales) through the now discontinued Google Checkout service. PayPal, on the other hand, charges a regular fee of 2.9% + $0.30 per transaction, which is comparable to average credit card swipe fees.
A prolonged battle between the credit card industry and retailers will eventually force retailers to explore other payment methods, with Google and eBay topping the list. Both Google and eBay could afford to slightly lower their transaction fees to undercut credit card companies, while relying on their core businesses of search and e-commerce, respectively, to balance out the costs. This means that these two tech giants could soon be considered rivals to Visa Inc (NYSE:V) and MasterCard.
Retailers have much to be grateful for
In the end, I believe that retailers need to stop bemoaning credit card swipe fees as a kind of necessary tax. Businesses aren’t forced to accept credit cards, and many smaller businesses do fine as cash-only businesses. Meanwhile, Visa Inc (NYSE:V) and MasterCard provide companies with an invaluable service – keeping transactions digital and allowing retailers to avoid the hassle, expenses and danger of stockpiling large quantities of cash.
Accepting credit cards also generates higher sales volume from more shoppers who use plastic for their everyday needs. Credit card usage also encourages pricier purchases – spending $1,000 in cash sure feels a lot more costly than swiping and signing on the dotted line. Lastly, swipe fees are often used to enable reward cards, which can keep customers coming back to spend more.
In other words, retailers have plenty to thank Visa Inc (NYSE:V) and MasterCard for. However, they continue to see swipe fees as taxes and an unnecessary expense. What’s more, retailers are unlikely to reduce product prices even if swipe fees were reduced. They would simply pass on that 2%-3% savings back onto themselves to slightly increase their own margins, as seen with their willingness to introduce checkout fees.
The Foolish Bottom Line
Therefore, I believe that the aggressive campaign of U.S. retailers to further reduce swipe fees is an unethical tactic aimed at prolonging endless litigation and forcing a higher settlement from the credit card industry.
This is the nasty part of the cyclical American dream – if a company provides a valuable service that becomes commonplace in the market, then the market will soon determine that owning the service is a fundamental right, and not a privilege. This means that retailers might get their way after all, and win an even bigger antitrust settlement against the credit card industry. While this might not be fair to Visa and MasterCard shareholders, it may open the door to alternative payment systems from Google and eBay – which could benefit both merchants and consumers in the long run.
The article The Whiners and the Winners of the Credit Card Wars originally appeared on Fool.com and is written by Leo Sun.
Leo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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