Duopoly Visa and Mastercard Vs. Retailers - Who Wins in a Free Market?

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Includes: AXP, MA, V
by: TraderMark

Oh this should be good; I always like to watch two of the largest lobbyist groups go at it, to see who has more Congress people in their back pocket. Err, I mean... I am always interested to see how the free market works out in the end. Frankly, with the duopoly power of Visa (NYSE:V)/Mastercard (NYSE:MA), I'd be siding with the retailers here, but that's an outside view of someone who actually likes competition. I'd also assume more retailers are contributing to Congress people's campaigns than Visa and Mastercard ever could hope to. But then we have the financial oligarchs with their massive sway on Washington in that corner as well. Get out the popcorn.

Via Bloomberg

  • Visa Inc., MasterCard Inc. and JPMorgan Chase & Co., already squeezed by new U.S. curbs on how credit cards are marketed to consumers, are girding for a renewed battle over $48 billion in fees levied on merchants.
  • Lawmakers are promising new rules to bring down the interchange fee, a charge on purchases sometimes topping 3 percent that’s split by the two banks serving the customer and merchant.
  • Supporters of the legislation include the biggest retail chains, restaurants and small businesses, which say the fees erode profit and inflate prices.
  • The debate pits the largest card lenders including JPMorgan and the two biggest payment networks, Visa and MasterCard, against Wal-Mart Stores Inc. and Target Corp. Interchange is the second-biggest cost after payroll, Target said, and merchants want to negotiate lower payments collectively without running afoul of antitrust law. (remarkable statistic)
  • “The real question is whether the government is going to jump in and get into the game of price control in the free market,” Chris McWilton, MasterCard’s U.S. markets president, told investors at a June 4 conference. San Francisco-based Visa said June 5 the legislation would raise consumer costs and cut rewards. A similar bill failed last year, the firm said. (let me chortle here at the "free market" reference, and I've been an investor in Mastercard for much of the past 2 years. See how it's been nearly impossible for even Discover to enter this fray with all the financial backing they have? Can you imagine "mom and pop transaction firm" trying to take on MA & V?)
  • The Credit Card Fair Fee Act would let merchants bargain together on interchange rates and designates the Department of Justice as arbiter. Card networks and lenders would be forced to disclose components of the fee and how banks share the money.
  • Interchange accounted for 19 percent of revenue last year for card-issuing banks on the Visa and MasterCard networks, according to trade magazine Cards and Payments. (again that is a remarkable statistic)
  • The networks handled about 89 percent of worldwide purchases on general- purpose payment cards. (so 89% handled by two firms, and there are huge juicy profits, rather than in a true free market, where a bevy of competitors would be angling to get a piece of... since there are not a bevy of competitors we can't even begin to say with a straight face this is an open or "free" market...which is why many major hedge funds own these 2 firms - talk about a wide moat)
  • Visa’s and MasterCard’s dominance allows them to “set these fees on a take-it-or-leave-it basis,” said J. Craig Shearman, spokesman for the Washington-based National Retail Federation. Shearman said interchange fees associated with the Visa and MasterCard networks tripled from about $16 billion in 2001 to $48 billion last year. (Hmm, Mr Shearman, it's a free market, why don't retailers just go to the competition? What's that? There is almost no competition. Hold on let me go check my "free market" handbook on what to do next)
  • In a typical transaction, the retailer’s bank deducts 1.9 percent from proceeds of the purchase, a sum known as the merchant discount rate. The largest portion -- the interchange fee -- goes to the bank that issued the card. The bank for the merchant keeps what’s left. Interchange fees average 1.7 percent of the purchase, according to JPMorgan analyst Tien-tsin Huang. ()sounds like a good deal for banks... wait, where have I heard that before...
  • Visa and MasterCard get paid a processing fee from each bank of 15 to 18 cents on a $100 purchase, Huang said in a June 5 report. MasterCard and Visa process about 58 billion transactions annually, company filings show.
  • “It’s kind of unprecedented to give one industry that kind of negotiating leverage over their business partners,” she said. (not when your industry are the oligarchs of American society)
  • Visa Europe Ltd. faces an antitrust complaint from EuroCommerce Inc., a retailer group that said this month that stores should be able to negotiate fees. MasterCard settled in April with European Commission antitrust regulators by reducing credit card interchange to 0.30 percent. (unfortunately banks are not royalty in Europe... only here)
  • JPMorgan, Bank of America Corp. and Citigroup Inc., last year’s biggest bank card lenders, don’t detail interchange revenue. (and here I thought we had a transparent banking system?)
  • “In every other aspect, merchants have the ability to negotiate and reduce their costs except this one,” said Jennifer Hatcher, spokeswoman for the Arlington, Virginia-based institute. Target lacks leverage because it’s “simply not realistic” to stop accepting cards, said Eric Hausman, a spokesman for Minneapolis-based Target

How about American Express (NYSE:AXP)?

  • The merchant discount at American Express averages 2.56 percent and doesn’t have an interchange component, said spokeswoman Christine Elliott. The legislation would have a “significant impact” on AmEx, which derived 49 percent of 2008 revenue from the merchant discount rate, Elliott said. (well if anyone would get hurt if this somehow gets passed it looks like AXP)

And let me guess how this ends: the banks will say if you lower our fees, you will hurt the American consumer as less credit will be available for them. See, I can almost repeat these lines in my sleep now.

But just for fun let's see what the lobbyist group of the day has to say...

  • JPMorgan and Citigroup, both based in New York, referred inquiries to the Electronic Payments Coalition. “Merchants don’t want to pay their share of the interchange system and they want consumers to pay it instead,” said Trish Wexler, spokeswoman for the Washington-based group.

Repeat in your sleep - we are all doing this to protect the consumer. We have the consumer in our heart. Our intention is to protect the consumer. Our lobbying dollars go to protect the dear consumer. Zzzzzz.

And since I always love to sneak a peak, lets see who the top campaign contributions went to via the Electronic Payments Coalition for the "help to educate our lawmakers on pertinent issues." I took a look. Bummer we can't tell - the money that went to "EPS" went to 3 lobbyists firms, who then worked their magic on a variety of programs commingling "EPS" money with countless others. So trying to break out which money went to whose campaign fund is impossible. Another victory for our oligarchs... they know the system, and how to cover their trails. However, all 3 firms have similar language on their websites - education!

Clients rely on us to educate policymakers on a wide array of legislative and regulatory matters. Our seasoned professionals understand how the Washington policymaking, political and business communities operate.

I pulled up one of the 3 firms the "EPS" gave their money to, (Johnson, Madigan, Peck, blah blah) and boy it's a whose who of firms they represent - I have to tell you there is a growth industry here!

  • Accenture
  • Altria
  • Amgen
  • AstraZeneca
  • American Institute of CPAs

Holy smoke - just there we have some of our largest lobbying sectors - the accounting/consulting guys, healthcare, and tobacco. And I haven't even gotten to the Bs! The same old names are there, farther down the alphabet don't you worry

  • Deloitte & Touche, Fannie Mae, Lockheed Martin, Mastercard, Mattel, Merrill Lynch, Microsoft, NYSE, and many others.

And this firm does not even make the top 20 of largest lobbyist firms in 2008. I am glad there is one surefire growth industry in America that creates jobs. I still remember the naive ways I was taught in middle school "and that boys and girls is how a law is passed"