Envision a world where credit card transactions are free. How could we accomplish such an outrageous feat? Well, crazy things can happen when you start to apply IT problem-solving initiatives to business issues.
I just finished reading “Free – The Future Of A Radical Price” by Chris Anderson. Chris, the author of “The Long Tail,” discusses how several factors--including the constant reduction of technology costs--have enabled companies to give away valuable services to their customers. Examples include Google giving away search functions and videos on YouTube, eBay giving away free phone calls with Skype and Linux as a free version of Unix software. But for some reason, the costs of processing credit card transactions have been immune to the same trends that have provided free versions of far more complex technology. Why?
Somehow, the system has evolved in a way that primarily protects the banks at the expense of retailers and, ultimately, customers. From a purely technological perspective, credit card transactions should cost a fraction of what they actually do. Moore’s Law, loosely translated, states that the cost of technology will reduce by roughly 50 percent every 18 months. If this law is true, then why, after decades of credit card processing, does Home Depot pay more for credit card processing than it does for employee healthcare benefits?
A credit card transaction is fairly complicated and involves several different organizations/people:
What is the big problem in this ecosystem? The merchant is the only one hit up for a fee to process a credit card transaction. The merchant pays a "merchant discount" to the acquirer, which then splits up the fee among itself (processing fee), the issuing bank (interchange) and the bankcard association (assessments). In the case of credit cards that offer rewards programs, the merchant also funds these customer perks through a forced higher interchange fee. Ridiculous! So how do we change it?
Interchange rates should be demolished.
Issuing banks will no longer be paid an interchange fee; instead, a transaction processing fee will be charged to manage the costs of providing authorizations, settlements and money transfers. The rate should be about equal to the current ACH transaction costs, which should serve as a good benchmark for the costs associated with moving money between two bank accounts. Rewards programs would then be completely funded by the issuing bank.
Remove Overhead From The System.
In this crazy New World, the bankcard associations are no longer in the transaction processing business. With 88 percent of all cards issued by the top 10 issuing banks, the acquiring banks should process directly with each issuing bank. They will take on this responsibility in exchange for lower assessment fees.
Reduce Costs Through Improved Efficiencies.
And what about the acquiring banks? Because their job will also be one of transaction processing, they will earn a flat monthly fee from each merchant rather than a transaction fee. A flat monthly fee? That is crazy talk! Now, imagine travelling back in time to 1999 and telling Michael Armstrong (then CEO of AT&T) that in just 10 years an Internet company would offer unlimited calling to anywhere in the world for just $24.99 per month. (Vonage recently announced this plan.) I’m pretty sure he would have told you that you were nuts.
Subsidize The Remaining Costs With Someone Who Gains Value.
OK, but I said that in this crazy New World credit card processing would be free. Except that the previous examples still add costs. Granted, this solution is a ton better than where we are today. But you were promised free. So, how do we get there? I’m going to leverage more of what I learned from Chris Anderson and his book. In the book, Chris discusses the concept of “free” as a “three party market,” where a third party subsidizes the costs of providing the goods or services between the merchant and the consumer.
An example is how TV stations can offer you free programming in exchange for broadcasting advertisers’ commercials. In our crazy New World of free credit card transactions, we are going to subsidize the costs of credit card transactions by leveraging a three party market. So how do we do this?
Acquiring banks can work with merchants and POS companies to pass along small “banner ads” that are displayed at the bottom of each receipt. The merchant has the opportunity to set parameters for which ads are displayed to avoid conflicts, such as making sure that no competitors’ ads are run. In today’s media-heavy world, eyeballs are worth money.
Let the acquiring banks display small banners that are placed above the spot on the electronic signature pad where a customer signs for credit card purchases. This option could be used in conjunction with selling receipt space.
Allow marketers to access information about spending at your location. Each company would be aligned with a central catalog of different merchant types. The transactions would then be categorized and aggregated in a central system that can be used by marketers for a fee.
Provide the line-item details of the transactions to a centralized database. The products and services would also be categorized and aggregated from many merchants. Although most large organizations would not dream of giving away such intimate data, thousands of small businesses would be happy to provide the data anonymously (only the industry would be required) in exchange for lower transaction fees.
That’s my case. It feels a little like a Sprint/Nextel commercial doesn’t it? (What if IT people ran the world?) Find major holes in my theories? Disagree with the concept? Love it like RockBand? Let me know: [email protected].