NYT PINs Visa on Transaction Fees

How screwed up does an industry have to be for competition to increase prices?

That’s the smart question at the center of The New York Times’s latest entry in its solid Card Game series with PBS’s Frontline. It looks at how Visa’s domination of the debit-card arena led MasterCard to raise its fees to try to compete.

Competition, of course, usually forces prices lower. But for payment networks like Visa and MasterCard, competition in the card business is more about winning over banks that actually issue the cards than consumers who use them. Visa and MasterCard set the fees that merchants must pay the cardholder’s bank. And higher fees mean higher profits for banks, even if it means that merchants shift the cost to consumers.

Seizing on this odd twist, Visa enticed banks to embrace signature debit — the higher-priced method of handling debit cards — and turned over the fees to banks as an incentive to issue more Visa cards. At least initially, MasterCard and other rivals promoted PIN debit instead.

As debit cards became the preferred plastic in American wallets, Visa has turned its attention to PIN debit too and increased its market share even more. And it has succeeded — not by lowering the fees that merchants pay, but often by pushing them up, making its bank customers happier.

In an effort to catch up, MasterCard and other rivals eventually raised fees on debit cards too, sometimes higher than Visa, to try to woo bank customers back.

With this series, the Times hasn’t had to hit the plastic business hard, it’s just had to pick up the rock a bit and let us all see what’s slithering underneath it.

This is the plumbing of the consumer system—something like a utility—and the industry has wedged itself in a unique position that let’s it take money from consumers without them ever really knowing it. The fees don’t hit them directly, of course. But they are built into the cost structure of retail and they get passed along to consumers through higher prices or decreased service. In this “Card Game,” Visa and Mastercard are the house.

The Times does a good job in this piece of explaining the history of how the PIN bizarro market came to be. Little did you know that you’d actually be interested in a piece explaining the history of PIN vs. signature debt transactions, but I think you will be. It’s pretty much on its face evidence of how the power structure in this market is messed up.

This doesn’t make sense, though:

Interlink, which has raised its PIN debit fees for small merchants to 90 cents for each $100 transaction, from 20 cents in 2002, is often the most expensive, especially for small merchants, Fed data shows.

One large retailer, who requested anonymity to preserve its relationship with Visa, provided data that showed Interlink’s share of PIN purchases rose to 47 percent in 2009, from 20 percent in 2002, even as its fees steadily increased ahead of most other networks — to 49 cents per $100 transaction in 2009, from 38 cents in 2006.

Why is the Visa Interlink fee nearly twice as much in the first paragraph as in the second?

And the piece takes a confusing six-paragraph detour into interchange fees, the subject of a previous story in the series. A paragraph or two would have done the trick.

But overall this is a good story—and an important one.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.