The credit card industry’s major players, in particular Visa and MasterCard, are coming under increasing attack as regulators label traditional practices as “overcharging” and question transparency, and as non-banks play an increasing role in new market segments, such as prepaid cards.
The squeeze on bank-owned Visa and MasterCard has been highlighted by the UK’s Office of Fair Trading (OFT) recently announcing that interchange fees charged by MasterCard’s UK members infringed competition rules (see p143). “This unduly high interchange fee was like a tax on UK consumers,” said the OFT chairman after a four-year investigation.
Although MasterCard strongly disagreed with the OFT’s findings, the cosy world of single set interchange fees is slowly unravelling not just in the UK, but also elsewhere. The industry’s billion-dollar secret is now being exposed. Australia’s Reserve Bank has led the charge in questioning and cutting interchange fees, the EU has followed to a lesser extent and Visa and MasterCard face major lawsuits in the US.
Interchange is important to a payment system because it facilitates growth. It also helps to overcome the key question of who comes first: the cardholder or the merchant. Without cardholders, merchants would have no incentive to accept credit cards and without merchants, cardholders would not carry cards.
Shifting sands
Today the old balances no longer apply as the conditions surrounding fees become more complex and variable. The relationship between fees and costs is changing and so, too, is the role of Visa and MasterCard.
Similarly the growth of the non-bank role in the explosive prepaid card market is changing the way Visa and MasterCard work in this new growing market segment.
Change is likely to breed more change and analysts suggest that once the tight interchange fee structure disappears, or the price umbrella is broken, the banks’ loyalty to either Visa or MasterCard may disappear soon after.
Meanwhile, MasterCard announced plans in September for an initial public offering in the first quarter of 2006. The plan is to wind up with a company owned 49% by the public, 41% by its current financial members and 10% by a charitable foundation.
MasterCard says it is making the changes to keep pace with the times. Without doubt, for MasterCard and Visa the times definitely are a-changing.
