By Patti Murphy
The Takoma Group
In "Regulation, deregulation, self-regulation," published in The Green Sheet, March 23, 2009, issue 09:03:02, I proffered the notion that financial services deregulation went awry because it failed to take into account basic human emotions like greed.
I still believe in that basic premise, but I think it was shortsighted of me to limit the discussion to greed.
The fact is financial markets are subject to the whims and fancies of individual participants - not just greed, but also decisions based on all manner of human emotions, perceptions and interactions. That makes markets unpredictable. And I'm not just describing equity markets.
It's time to face the music folks: The payments space today is radically different than it was just 10 to 15 years ago. It's time for acquirers and their partners (especially the card companies) to accept and work with this change rather than fight it.
Who among us, just a decade ago, truly expected usage of Visa Inc.- and MasterCard Worldwide-branded debit cards would outstrip credit card payments? Who back then (other than a few dozen champions of "check electronification") expected we'd see billions of checks a year digitized and cleared electronically?
The most profound difficulty we face as businesspeople today is that many of the basic principles upon which financial markets and individual companies have been built are woefully out of date.
George Soros, an international investor (and philanthropist) who has made billions of dollars through hedge funds, addressed this in his book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means.
He wrote, "One cannot escape the conclusion that both the financial authorities and market participants harbor fundamental misconceptions about the way financial markets function. These misconceptions have manifested themselves not only in a failure to understand what is going on; they have given rise to the excesses which are at the root of the current market turmoil."
Despite prevailing economic theory, financial markets do not tend toward equilibrium, Soros insists, because investment decisions (all financial decisions, really) can and generally are influenced by the perceptions and interpretations of the individuals involved. "Both markets and regulators are fallible," he wrote.
No lesser a spiritual authority than Pope Benedict XVI made a similar point. "Without internal forms of solidarity and mutual trust, the market cannot completely fulfill its proper economic function," he wrote in "Charity in Truth," an encyclical released in July 2009.
"And today it is this trust which has ceased to exist." (An encyclical is a written document detailing Papal views on specific moral and social issues.)
For years, acquirers and their partners have trusted the old ways of doing business would carry payment card businesses forward ad infinitum. But that's not the case; the ongoing debates over interchange and data security drive home this point. Data security is crucial. If the card industry cannot ensure the integrity of systems that store and carry payments and related cardholder data, merchants and consumers will find alternatives.
The Payment Card Industry (PCI) Data Security Standard (DSS) was a good start, but as a succession of well-publicized data thefts has shown, it's not enough.
Criminals, merchants and consumers understand this changing market dynamic. Some processors do as well, and several are pressing for greater use of encryption to protect card data.
However, Visa and the PCI Security Standards Council prefer pointing fingers to accepting reality. Using what I call a "Mobius defense," they insist, in essence, that the PCI DSS works; the only times it hasn't worked is when an organization has been noncompliant.
And companies deemed compliant by Visa that were subsequently breached obviously weren't compliant, or they would not have been breached. Or so the logic goes.
How many breaches are needed before the card companies accept that it's time for a new, broader approach to card data security?
I've lost count of the number of friends who have approached me in the past year about alternatives to using credit cards for online purchases. Most are considering (or using instead) prepaid cards or alternatives like PayPal. I also know people who refuse to use cards at large retail chains. Figuring those stores are more likely to be hacked, these folks are using cash and checks instead.
Meanwhile, retail merchants have become fervid in their crusade against interchange.
In early July 2009, 7-Eleven Inc. launched a campaign, taking the discourse to the people, with petitions in all 6,300 stores it operates throughout the United States.
"Ask Congress to stop credit card companies from charging unfair transaction fees to the businesses you shop," reads a prominently placed sign with a signature page at every checkout counter. Darren Rebelez, Executive Vice President and Chief Operating Officer at the Dallas-based chain, said 7-Eleven hopes to collect at least 1 million signatures.
In an article published in the NACS Daily News, a publication of the National Association of Convenience Stores, Rebelez described the petition drive as a "grass roots effort" and noted that individual small business operators run roughly 75 percent of 7-Eleven stores in the United States.
In early July 2009, the The Huffington Post blog also weighed in on the subject with an article titled "TARP recipients fighting to keep charging exorbitant credit card fees." It can be found at www.huffingtonpost.com/2009/07/09/tarp-recipients-fighting_n_228682.html.
At least two bills are pending in the U.S. Congress that would impose drastic changes in the way interchange is set: S.1212 and H.R. 2695. Experts who have studied the bills say both are seriously flawed. If that's the case, it's time to focus on workable changes rather than dig in to defend the status quo.
Addressing the issue at a recent payments industry conference, Josh Perez, Group Executive, Innovation Platforms at MasterCard, insisted change wasn't necessary because free markets work. "There's absolutely zero evidence that lower is better," he said, adding that merchants who think they can get a better deal elsewhere, should.
It reminded me of the skit Lily Tomlin made famous on the 1960s comedy "Laugh In." As a telephone operator dealing with cranky customers, her typical retort was, "We don't care; we're the phone company."
At the time, AT&T was the telephone company.
Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. E-mail her at email@example.com.
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