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Visa, MasterCard settlement with retailers to affect mcommerce

July 17, 2012

New rules for processing credit card payments could impact mcommerce after Visa, MasterCard and several banks reached an agreement last week to settle an antitrust suit brought against them on behalf of 7 million retailers that includes new rules enabling stores to charge consumers more if they pay for a purchase with a credit card.
While such a surcharge would likely dampen interest in mcommerce – which is often funded by a user’s credit card – the  more likely scenario is that retailers will continue to swallow the fees while promoting lower-cost alternative payments.

“Ultimately what a surcharge could mean to mobile payments is to establish a specific value for one payment form over another and as a result, place pressure on the mobile payment provider, to justify to the consumer the value of their product,” said Dave Kaminsky, emerging technologies analyst at Mercator Advisory Group, Maynard, MA.

Far enough?
As part of the settlement, Visa, MasterCard and the banks agreed to pay the retailers more than $7 billion and to reduce the fees, called swipe or interchange fees, for eight months. Under the new rules, retailers will be able to pass on the fee that credit card companies charge them for processing credit card transactions to consumers, a fee that averages around 2 percent.

However, it is unclear yet if any retailers will charge more for credit card purchases as a result of the settlement.

If retailers do pass on the fee to customers, this could impact how often consumers use credit cards to make a purchase. By extension, this would dampen mobile commerce sales since credit cards are often the funding source for mobile payments.

Alternative payments such as LevelUp may see boost from settlement

The case, which dates back to 2005, saw retailers allege that credit card companies and banks had conspired to fix the fees paid for processing credit and debit card transactions.

The settlement still must be approved by a judge. It is possible retailers will oppose the settlement on the grounds that it does not go far enough, as the interchange fees are likely to return to historic levels after the eight month period during which they are being lowered.

Mobile payment providers and others will be watching closely to see which retailers decide to pass any fee directly onto consumers. Since many of the plaintiffs in the suit were supermarkets and convenience stores, they may be among the first to such moves.

Merchants in industries where comparison shopping is prevalent or credit cards are the primary method used, such as travel and online shopping, will be at a competitive disadvantage if they pass along an interchange fee to consumers, who will simply spend their dollars elsewhere.  

Retailers who do not pass on the fees will be at an advantage. For example, Amazon has been known to be willing to swallow significant costs in order to gain market share.

“The merchant community will look to the leaders and specifically to those merchant who were plaintiffs in the case and who do not opt out, to do something,” said Patricia Hewitt, director of the debt advisory service at Mercator Group.

“Many of them were supermarkets, so I would look to the supermarket, convenience store, and gasoline merchant categories to be first to surcharge,” she said.

“Any big retailer like Amazon will most likely take their time figuring out what to do and the competitive pressures will be enormous for first out of the gate from that bunch.”

Boost for alternative payments
The lack of a more definitive solution to the problem of interchange fees might also spur retailers to open the door wider for alternative payments, which often charge lower processing fees and are popular in mobile payments.

For example, while Amazon could continue to assume the cost of interchange fees it could also, at the same time, promote lower cost alternative payment methods to its customers.

“If the settlement is accepted,  merchants will be able to promote lower-cost forms of payment and we’ll see many roll out the welcome mat to innovators like LevelUp and Dwolla whose business models are based on providing a low-cost payment alternatives,” said Denee Carrington, New York-based senior analyst at Forrester Research.

“The lack of transparency with most mobile wallet solutions could create yet another speed bump in the adoption of mobile payments, but I think we’ll see innovators like LevelUp use the opportunity to accelerate their merchant acceptance and active merchant promotion for their mobile wallet solutions,” she said.

For example, LevelUp recently eliminated such processing fees completely. The mobile app enables users to link a credit card to the app and then pay for a purchase with a unique 2D bar code that appears on the screen.

Instead, the company will be focusing on making money via value-add retail campaigns to drive customer acquisition and build loyalty.

“We see Interchange, the cost to move money, as a value-less service and one that is going away,” said  Seth Priebatsch, CEO of LevelUp, Cambridge, MA.

“When Google decided to make information free, it chose to monetize only around providing value beyond the transfer of information, by using search ads to drive visitors to a Web site,” he said. “LevelUp does the exact same thing, but with money.

“We’re providing the frictionless flow of money, and monetize only when we provide value beyond the transfer of money by using campaigns to drive customers to a store.”

Final Take
Chantal Tode is associate editor on Mobile Commerce Daily, New York

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