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Card and Interchange Hearings with the Competition Commission

Card and Interchange Hearings with the Competition Commission. 19 April 2007. There are significant benefits to universally accepted cards. Benefits to Merchants:. Benefits to Consumers:. Network Effects. Guaranteed payment / risk management.

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Card and Interchange Hearings with the Competition Commission

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  1. Card and Interchange Hearings with the Competition Commission 19 April 2007

  2. There are significant benefits to universally accepted cards Benefits to Merchants: Benefits to Consumers: Network Effects Guaranteed payment / risk management Lower cost / risk alternative to cash and cheques Outsourced systems / processing Ease of use and convenience Likely to generate higher retail sales Access credit Less cash management Records of expenditure

  3. Issuing and acquiring are growing rapidly and are subject to vigorous competition Issuing Acquiring • > 10 issuers • Proliferation of credit card offerings • Market share changes of up to 4% p.a. in credit card advances (DI900s) • Continuously pressure to review merchant pricing • Falling margins CAGR 2002-2006. Source: FRB

  4. FNB has competitive, simple pricing on POS, Mini ATM purchases and Cash Back @ POS FNB has low, flat fees compared to our competitors, driving the growth in debit card transactions

  5. This highly competitive market has resulted in impressive card growth Volume Growth of Payment Streams 2002-2006 (CAGR) 129% High take up of cards Cash is the largest volume +20% +11% -11% Cheques Cash Credit Cards Debit Cards Source: FRB Data

  6. But there are significant costs and unbalanced demand • In order to offer cards as a payment mechanism, banks incur huge costs • Either merchants or cardholders need to pay these costs • Benefits enjoyed by both consumers and merchants, but retailers’ willingness to pay is greater than consumers’ • Demand imbalances will remain even when maturity is reached • Incentives differ for the four parties. How should optimal pricing be achieved?

  7. Interchange needs to reflect the dynamic nature of the market Drives interoperability Balances the two sided market The four party model and the use of interchange are key contributors to solving the imbalances, supporting uptake and driving competition The current model has contributed to these positive outcomes Interchange No better alternative that is more competitive and has the same incentives for uptake Where interchange is not present, uptake is slow and incomplete

  8. And is likely to lead to continued success as dynamics continue to change… For Example: • Introduction of EMV • Growing cash back @ POS • Continued growth of debit cards • Fuel interchange • Continued shift away from cash • New product and service innovation The setting of the interchange has a big impact on the incentives for further improvement FRB favours the past approach, i.e. periodic reviews by a third party as an input into a multilateral setting of the interchange rate at an appropriate level

  9. Appendices

  10. Are there viable alternatives to interchange?Issuer & merchant set interchange directly Impractical due to difficulty of bilateral negotiations Banks need to negotiate with 120,000+ merchants Large retailers benefit due to their market power Small retailers may be prejudiced  someone needs to cover the costs

  11. Are there viable alternatives to interchange?The three party model

  12. Purchase goods / services using card payment instrument Cardholder Merchant Card Payment Facility Settlement & Payment Services Convenience & Credit Merchant Service Charge Card Fees Issuer Acquirer Settlement & Credit Risk Bearing Interchange Fee The Four Party Model (Credit Card)

  13. Purchase goods / services using card payment instrument Cardholder Merchant Card Payment Facility Convenience & payment instrument Settlement & Payment Services Merchant Service Charge TransactionFees Issuer Acquirer Settlement & RiskBearing Interchange Fee The Four Party Model (Debit Card)

  14. Cardholder Merchant Purchase goods / services using card payment instrument Card Payment Facility Card and transaction fees Authorisation and settlement services Processor Convenience & payment instrument & credit risk, where applicable Merchant service change Issuer / Acquirer Carriage Fee The Three Party Model

  15. Merchant Service Charge & Associated Benefits • Highly competitive market • Benefits acquirers give to merchants include: • Access to a Global Payment System, interoperability • Multiple products, channels and value-adds • Safe and convenient payment mechanism to transact with their customers • Guaranteed payment for goods and services • Specialised front and back-end support services • Education • Compliance with local and international standards • Other functions of the acquirer include: • Settlement, merchant acquisition, transaction retention, managing risk, data security, maintain standards, performing investigations, authorise processing, clearing, connectivity, manage disputes, merchant assessment and management, processing costs

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