Wednesday, 15 January 2014

Trojans at the terminal

The cost structure of PayWave cards hit the mainstream news yesterday. Its a good piece but there is also a fascinating story about business models in here.

PayWave is Visa's version of what is known in the trade as "contactless" technology. MasterCard calls it PayPass and uses the All Blacks to advertise it. Contactless functionality can be linked to either a debit or a
credit account and the new scheme (i.e. Visa or MasterCard) debit cards all have it installed.

NZ is a challenging market for Visa and MasterCard because we have a stunningly efficient and very widely used EFTPOS system. This system was genuinely world leading. It is the reason NZ is the most intensive user of electronic payments in the world. The EFTPOS system is owned and operated jointly by the banks and was developed with the aim of saving them money. It does that in two ways: by reducing cash handling at bank branches, and by inducing people to leave cash in call accounts that pay little or no interest.

Because of EFTPOS, the big card schemes have been mainly limited to supplying credit cards here, even though they also make good money supplying debit cards in most other countries. What to do?

Answer: break down resistance using the old Trojan ploy. That needs to happen on three different fronts (this is a platform business). To keep the merchants happy, it was agreed to charge no fees when scheme debit cards are used like an EFTPOS card (i.e. swiping the card through a terminal at the merchants place). What about getting the banks on-side in a situation where there are no merchant fees available? The details are secret but basically a deep-pocketed card scheme can fairly readily find ways to make a banker happy about issuing its cards.

All good so far. Now to get cards into the hands of consumers. This has been a pretty easy sell: would you like to keep your crusty old EFTPOS card or take one of these cool new scheme debit cards that is accepted everywhere and you can use online, for only $10/year? At this point, getting on for half of the population has said yes.

But the card schemes still aren't getting fees from these new cards. There are two ways around this. One is to wait until EFTPOS is marginalised a bit more and then start imposing merchant fees on debit cards. That might still happen, but in the meantime, technology has come to the rescue in the form of contactless cards. By providing a bit of extra functionality, the barrier to merchants paying fees falls a bit. All the better if new terminals are contactless-enabled by default, as they are.

Its all very clever stuff, but the merchants are obviously not happy, and with good reason given the level of fees being charged on what was previously an EFTPOS transaction. This is only heading in one direction though, as more and more people say yes to that cool new scheme debit card and consign their EFTPOS cards to the rubbish bin.

One final point. There is no official oversight of this stuff in NZ. There are three organisations that might be thought responsible: Payments New Zealand, the Commerce Commission and the Reserve Bank. They all think its someone else's job. That's kind of true except for the Reserve Bank which in my view is ducking its statutory responsibilities, but that's another story.

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