Interchange Battle Prompts Retailers to Seek Payment Alternatives.

Interchange, the fees retailers pay on every credit and debit card transaction, has been a contentious point in the retail industry for years. Can alternative payment systems relieve some of their pain?

Such systems, which include “contactless payments” such as using cell phones in lieu of plastic, are a long way from mainstream use in the United States. Japan appears to be the leader in cell phone payments, and even they are far from full consumer and merchant acceptance.

However, given the acrimony between retailers and card associations over fees, providers of alternative systems feel that they can carve a profitable niche by helping retailers cut interchange.

“Networks like ours are acting as a [processing gateway] between the retailer and customers where we can lower the payment processing fees,” says Robert Wesley, president and chief executive officer of MobileLime, which is trying to develop a network of merchants that accept payment through cell phones.

Numerous retailers have filed lawsuits charging card associations MasterCard International and Visa, as well as member banks, of collusion in setting fees. The card associations set the interchange rates, and the bulk of the fees go to card-issuing banks, says Craig Sherman, vice president of government affairs at the National Retail Federation (NRF).

“The interchange fees have been skyrocketing and there are over 50 lawsuits pending, some of which are class-action,” he says.

According to a Morgan Stanley study, the average interchange rate in 2004 was 1.87 percent of the transaction price, amounting to $17.4 billion in fees. In 2000, the rate was 1.58 percent, totaling $9.4 billion in fees. The rate is expected to reach 1.86 percent by 2010. “These fees are driving up the cost of merchandise,” Sherman says, echoing retailers’ complaints.

Merchants and industry associations such as the NRF and the Food Marketing Institute (FMI) have discussed an alternative merchant-backed payment network to help lower interchange, Sherman says.

“There used to be a time when retailers would honor each other’s store cards within a community,” he says. “It’s a similar principle.”

But displacing the established order in plastic — and interchange — is a little akin to displacing Mount Everest. With hundreds of millions of Visa and MasterCard cards in circulation, and more going into circulation every day, it seems nearly impossible to get consumers to change quickly, Sherman says.

Still, some companies are taking a stab at it. MobileLime and Debitman Cards, two technology providers, have nascent efforts at building alternate payment processing, “acting as an automatic clearinghouse” to process transactions, Wesley says.

Cell phones might prove to be a viable alternative. Analysts expect cell phones to become widely used as a way to pay for goods and services in the U.S. over the next few years. In Europe and in Asia, Japan in particular, technology companies are enabling cell phones to be used as payment devices.

The process, sometimes referred to as “contactless payment,” allows a cell phone or another device to initiate payment by swiping it near a point-of-sale terminal. The chips in these devices use radio frequencies to identify the cell phone user, and initiate processing of a transaction. The cell phone is tied to a credit or debit account.

Credit card companies have seen the potential in cell phones as a payment device, and have endorsed the technology in Japan. Industry observers say these types of endorsements can help card companies protect themselves against technology companies that are trying to break into the payments industry.

Some are predicting that cell phone payments will eventually replace wallets. “[The cell phones] is a personal organizer, it can play music and videos and it will eventually replace the wallet to pay for goods and services,” says James Van Dyke, founder and president of Javelin & Strategy Research in Pleasanton, Calif.

“The technology exists, it’s just making sure the network is secure,” he says.

MobileLime acts as a third-party negotiator with processors such as NYCE and STAR to get a lower merchant fee, Wesley says. MobileLime will install the software that allows retailers to interact with numerous processors, acting “like a switch to processors.” He says that MobileLime provides retailers a choice in processors and eliminates the need to outfit store terminals with different software to communicate with processors.

Instead of issuing credit cards, MobileLime allows retailers to accept cell phone numbers: A customer registers a cell phone number with MobileLime, and attaches a credit or debit card account to that number. The company can take batches of transactions and work with processors to conduct the transactions for lower fees, he says.

Debitman Cards is company trying to provide a payments alternative. Retailers can issue and accept Debitman cards. The company charges a flat fee, 15 cents, to process payments, compared to 25 cents to process a debit card transaction, says R. Scott Hatfield, president and COO of Debitman Cards. Credit card fees are higher, he adds.

“Regardless of how a consumer pays for the transaction, whether it’s through a card or eventually a cell phone, we can process the transaction,” Hatfield says.

Retailers that issue a card will receive a refund if customers use Debitman card at other retailers. Debitman is currently working with four major payment processors and recently negotiated with Wal-Mart Stores to accept its card. Getting one of the largest retailers to take the Debitman card could change the playing payment processing field, Hatfield says.

For retailers the appeal is lowering interchange fees, says Mark Stearns, vice president of IT operations at florist KaBloom, which is working with MobileLime. The other perk, he adds, is marketing through another channel, especially for people on the run. “If people are in a rush, they can call in their orders by phone and we’ll send them a text message when it’s ready.”

By Kathleen Kiley, Managing Editor, Consumer Markets Insider

Courtesy of http://www.kpmginsiders.com