Come February, Wal-Mart Stores Inc., will no longer accept MasterCard debit card purchases unless they are authorized with a personal identification number rather than a signature.
The world's largest retailer was one of millions of American retailers that won the right, in a recent legal settlement to a class-action suit, to break the "honor-all-cards" rules heretofore imposed by the MasterCard and Visa associations. The card associations may no longer require merchants to accept their debit cards if they accept their credit cards. And Wal-Mart has served notice that it will bypass the MasterCard signature debit system.
Wal-Mart says it is doing this to save money. The card associations charge them more to route transactions through their signature-based debit card systems than competing electronic funds transfer networks charge for transactions requiring customers to punch in a PIN code. Wal-Mart will continue to take Visa debit cards - but only because Visa gave it a better deal than MasterCard.
So far lips have been sealed when it comes to the deals MasterCard and Visa offered Wal-Mart. On December 11, Visa showed most of its hand-it announced signature debit-card interchange fees that, on a $40 purchase, range from about 5% lower for smaller merchants to almost 30% for megaretailers; that's compared to the rates the card associations levied before the settlement. Not a bad deal for the big guys, but hardly a fire sale.
Economics and history tell us that few merchants will follow Wal-Mart's lead and tell customers they can't pay with signature debit.
Many customers like being able to pay in a variety of ways. Hassling them at the cash register doesn't make great business sense. Millions of merchants decided to take plastic in the first place because it helps them make more sales - and because it generates customer goodwill, just like helpful staff, evening shopping hours, and escalators. That's why most retailers accept American Express cards even though it costs them more than other cards, and almost all customers could pay with another card if they had no choice.
Retailers have always had a love-hate relationship with cards. Diners Club introduced in Manhattan in 1950 the first card that customers could use at a variety of merchants. It charged merchants 7% of the bill for the service. Soon thousands of retailers across the country - mainly in the travel and entertainment industries - accepted the card.
But some balked. The American Hotel Association was so irked by the levy that it started its own card program. Hotels paid no fees, but were left with the tasks of billing and collection. They soon gave up and folded their card program into American Express.
To rally popular support, retailers wave the flag of consumer rights. Customers who pay with cash, they say, are unfairly burdened with some of the costs that sellers must recover from card transactions. But effectively forcing cash customers to share the cost of card transactions is no more unfair than requiring walk-in customers to pay part of the cost of the "free" parking behind the store or asking online shoppers to bear part of the cost of heating the store in winter. Indeed, any shopping venue offering amenities that are not uniformly appreciated by customers is creating a matrix of "unfairly" shared costs.
But the primary issue driving the politics and law of card transactions is the division of fees between merchants and cardholders. Card companies like American Express issue cards and make contracts with merchants who accept those cards. American Express charges both you and the merchant. And, through trial and error, the company long ago discovered that it could maximize the efficiency (and profit) of its payments system by collecting the bulk of its revenue from the merchant side.
The fact that thousands of bank issuers must join forces in large networks to gain economies of scale complicates the mechanics - not to mention the politics and legal issues. When you pay with your Visa card, the chances are that the bank that issued the card is not the bank that has contracted with the merchant to collect on its behalf for card transactions. So two banks must arrange to split the fees, and they must decide who bears the risk if the merchant doesn't deliver the goods or you don't pay your monthly bill.
With thousands of banks in the payments loop, the associations realized that individual bank-to-bank agreements would require literally millions of interbank negotiations. So they established a default agreement that lays out who bears the risk and how fees are split. Merchants' banks pay cardholders' banks a uniform interchange fee. And this fee largely determines the size of the processing fees that banks collect from merchants. Though banks and merchants' banks are free to form bank-to-bank agreements, most find it's not worth the time it would take to establish and manage.
If many merchants stopped taking cards or bargained down interchange fees, banks would lose substantial revenue. To offset the loss they would have to raise fees to cardholders. And, no surprise, banks that issue debit cards began planning for this contingency after the legal settlement was announced. I'm guessing, though, that debit card interchanges fees won't decline much beyond what Visa announced last month, and that few retailers will drop either signature brand. The amount Americans charge on MasterCard and Visa debit cards has grown explosively in recent years, and few retailers will be willing to risk alienating debit card customers.
But if history is any guide, retailers won't give up efforts to shift the costs of card transactions back to cardholders. As the legal settlement shows, they have found better ways in America to shift costs than the boycott that the hotels tried in the 1950s, and Boston restaurants threatened in the early 1990s. Moreover, they might take the cue from other countries, where retailer associations have successfully lobbied regulators and legislators to look into lowering their fees.
If merchants are successful in making it more expensive for consumers to pay with plastic, the growth of efficient card-based electronic transactions will slow as shoppers are encouraged to complete transactions with cash or paper checks. And that means that, in the end, everyone will pay.
