There’s no shortage of retailers finding ways around paying the steep (and rising) costs of payments processing. From cash discounting to Walmart suing the card networks, nobody likes the taxes the payments processing industry imposes. Sure, the players in the “value” chain will beat their chests about security, but why does it cost $0 to move money to friends securely on Paypal, Venmo or any number of other platforms?
The reality is that payments processing is a legislated monopoly. While there exist a group of people who would like Washington to step in and legislate lower rates like regulatory bodies have done in Europe or Australia, there’s actually a much easier way to solve this problem.
First we’re going to look at Europe as a potential model.
In 2018 the EU started PSD2. If you want a great resource on what this means read this article. In short, the directive requires EU banks to open themselves up to APIs. This means non-financial institutions (i.e. tech startups and innovators) will be able to move money for transactions, thereby increasing security, speed/settlement of funds, and reducing costs. Here’s an example of how a London-based startup is using this opportunity to significantly reduce the costs of payments.
To some extent PSD2 was the EU’s natural next act following their IFR (interchange fee regulation) which passed in 2015. IFR capped interchange though the card issuers and networks were the ones that felt the brunt of the legislation: those sneaky merchant acquirers just added more fantasy fees to prop up their margins. Wait, isn’t that the opposite of what regulators were trying to achieve?
The IFR perfectly demonstrates how and why black markets exist: people are incentivized to act in their own best interest and legislators have no idea how free markets work. Just because you raise taxes doesn’t mean you’re going to make more money; often times citizens will find creative ways to avoid paying higher penalties on output (i.e. taxes). If you want to eliminate the black market you must embrace the free market.
Which is why if the goal is to eliminate the legislated monopoly that is interchange we must open up the payments market to competition
The easiest way to do this is to grant more bank licenses. Square, for instance, applied for a bank license in early 2018, only to be denied (technically it was withdrawn but that’s because it was going to be denied). Square is now reapplying.
If innovators like Square can more easily acquire such licenses and compete, they will find ways to create financial instruments that offset any loss of revenue associated with eliminating interchange. Robinhood did away with trading commissions and makes money in very creative ways. A company like Amazon, Facebook, Google or even Apple could likewise invent new products with the data generated from moving payments that would surely be just as lucrative as interchange. And instead of coming at the expense of the merchant they might actually provide an ROI.
Our point is this: if you want to eliminate interchange you will not do so by legislating it away. This country has declared a number of drugs illegal but that doesn’t mean one can’t get drugs on a thriving black market, all wrapped in sex trafficking, cartels, and murder.
Interchange is a tax with zero value add. Let the power of the free market bring it down.
