As merchants and issuers contend for who gains when a credit card user transacts at a retail store, the fundamental question remains: Is the consumer using banking services to shop in a retail location, or is a retail customer trying to access their credit account.
The WSJ covers this issue today in their article Shoppers Love Rewards Credit Cards. Retailers Hate Them.
- Consumers have become addicted to credit cards with generous rewards programs. Retailers are trying to cut them off.
- Large merchants including Amazon.com Inc., Target Corp. and Home Depot Inc. are pushing for the right to reject some rewards credit cards, which typically carry higher fees for merchants. They are likely to opt out of a roughly $6.2 billion settlement Visa Inc., Mastercard Inc. MA +0.42% and several large banks recently reached with merchants and continue to make their case in court, according to people familiar with the matter.
One of the issues here is the “Honor All Cards” rule, which was instituted in the infancy of debit and prepaid cards. Issuers wanted to ensure that other payment products could be used with the same level of confidence found in credit cards. Yes, there is revenue to be made but there is also credit risk. Remember the Recession? Top issuer losses were in the billions.
- Banks have come to rely heavily on the fees they earn from credit cards. All told, merchants paid credit-card issuers $43.4 billion in Visa and Mastercard credit-card interchange fees in 2017, up 68% from 2012, according to the Nilson Report.
We think the system works well today. Yes, interchange is relatively high but more transactions are shifting to the riskier on-line channels. Credit losses are in the 4% range. Return on Assets is plummeting.
At risk are smaller banks as we told the Wall Street Journal. In our view, we expect to see some small and middle market exits in 2019 and 2020 as issuers see reductions in top tier revenue
- An upending of the fee structure could lessen the incentive for small banks to issue credit cards, said Brian Riley, director of credit advisory services at Mercator, cutting into the fees the card companies collect and leaving them with a customer base more heavily made up of big banks that have more clout to negotiate directly with merchants.
Bank customer or merchant customer. It remains to be seen. For now, I will stick with Mastercard and Visa.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group