Interchange fees do two things. They do encourage banks to issue cards–they a long way towards getting banks to start massively issuing debit cards (i.e. card branded signature ATM cards)in the 90s; and I’m not sure that getting additional credit cards out there has as little effect as you suggest.

More importantly, though, and here’s why I agree, they also encourage consumers to use those cards to pay for things–they grease the way, encourage people to use cards rather than cash, and maybe even to make purchases they wouldn’t have otherwise.

Now, the big business model question you raise is whether there’s a better way to do this. You can flip the model and have merchants pushing cards (store credit cards, closed-loop prepaid cards, new merchant-friendly system cards like Gratis–www.gratiscard.com–or Tempo–formerly Debitman–or HSBC ACH-based debit cards) with their own loyalty programs greasing the wheels. If merchants can succeed in doing that–by themselves or in concert with a new merchant-friendly system–then it is possible, as you say, that power will shift back to the merchants.

I wouldn’t discount the risk that presents to MasterCard and Visa just like I wouldn’t understate the challenge that merchants have in dislodging the merchant-pays model that has been with us for 56 years (since Diners Club started in Manhattan in 1950, with cardholder paying nothing and merchant paying 7 percent) and that is backed by entrenched players.

I haven’t yet read your book — although I have pre-ordered it on Amazon — but I believe the posting above misses the mark.

You make the point:
“acquiring merchants is a commodity business so the real power lies with getting big banks to issue cards.”

The presumption seems to be that the more cards that are issued the more usage?

Obviously, there are plenty of cards out there today. You might have been right 20 years ago, but there seems to be no lack of cards in any one’s wallet now. The battle for issuing cards was won years ago.

On the other hand, getting consumers to USE a specific card in their wallet IS where the real leverage lies.

There was a great piece of analysis written by Dan Schatt from Celent, titled: “Making Loyalty Pay: The Relationship Between Rewards and Payments.”

In the piece Dan makes a strong case, which I believe, that reward programs will be the ultimate lever to shift buyer activity and dramatically alter the interchange space. He cited a study that claimed blended and cash back programs will account for 86% of all credit card rewards programs by 2010. He claims: “The tension over interchange is leading to new business models that address merchant payment processing costs and loyalty program shortcomings in new and highly effective ways.” And: “Today, those programs occupy the wallets of three quarters of all U.S. cardholders and have come at a significant cost to merchants, who must pay higher interchange fees on rewards cards. This has become an increasingly difficult burden for merchants to bear, who have not seen the same sales increases, lower churn rates and incremental sales as a result of issuer or home grown loyalty programs. The bottom line is that a card issuer’s interchange revenue has grown at a significantly faster clip then retailer sales, which has exacerbated tensions among merchants and issuers alike.”

Where Dan’s analysis went — and where again, I agree — is that effective and creative retailer loyalty programs independent of, or uniquely tied to, payment options will shift the power out of Visa and MCs hands back to the retailers. This is the same seismic shift you explain elsewhere re: Google and the internet shifting power away from the newspaper industry.

I do look forward to the book. This space is one I’m keenly interested in.

Brian