Australia's interchange cut pressures issuers to get experience right
Credit card interchange fees remain a hot topic within the payments industry. Despite the record $6.2 billion settlement reached last year in the class action suit that was filed against Visa and Mastercard, the debate rages on about how card companies operate and how they set and administer fees.
The Australian Government Productivity Commission has recommended that interchange be abolished by the end of 2019. Those of us who have been around the industry for a long time can recall the original purpose for interchange fees and the value provided by this model: to stimulate the issuance and use of credit cards as a payment instrument.
However, significant changes in technology, business processes and consumer behavior continue to drive the debate about the relevancy and fairness of this model in the modern world. The payments landscape will continue to become more complex, and card companies can expect to face more challenging times ahead.
Major changes (reductions) to interchange fees like those being proposed in Australia and other markets will certainly have a significant impact on not only card issuers, but the entire payments industry. Marginal players may leave the card business, realizing it does not offer as much opportunity as it once did, leaving only select card companies to compete in the marketplace.
Of course, interchange fees make up a significant portion of revenue for card issuers. Grant Halverson, the CEO of McLean Roche, a payments consultancy in Australia, estimates that banning interchange in Australia would lead to issuers losing AU $2 billion (roughly $1.43 billion USD), or 22 percent of their revenue. Confronted with such a significant blow to their bottom lines, issuers (and issuer processors) will need to look for substantial new sources of fee-based income or face the prospect of exiting what has been a very profitable business.
Given the competitive nature of the current marketplace and the low probability that interchange rates will actually go up, issuers and processors need to continually evaluate their infrastructure, business processes and operational models to ensure that they are running as efficiently and cost effectively as possible.
At the same time, it becomes even more important that every new payment type, every new connection and every new transaction — every consumer experience — works perfectly every time. Consumers demand a consistent payment experience across all devices, applications and platforms. Their expectations are already high and they are becoming less forgiving of any organization that does not deliver a “perfect” payment processing experience.
It is now imperative that all industry participants test all aspects of their payment systems completely, accurately and regularly to help ensure that they are providing the best payments experience possible. Next-generation testing strategies, processes and solutions are required to operate with the speed, accuracy and efficiency that consumers want and that the very competitive and unforgiving marketplace demands.
The payments industry continues to evolve rapidly and it seems that new change is occurring every day. The potential loss of interchange income for card issuers only serves to highlight the need for all organizations to modernize and optimize their operations in order to deal with whatever change happens tomorrow.