Dive headfirst into the complex world of interchange fees and understand how a mammoth $30 billion antitrust settlement is poised to reshape the financial tech landscape. Your pockets and the broader US market are on the cusp of experiencing the rippling effects of this legal juggernaut. We're peeling back the layers of this financial onion, examining the pivotal roles of banks, the enigmatic interchange fees, and the resilience of Visa and MasterCard's business models amidst industry upheaval. We're also discussing how risk and fraud prevention play into fee determination and why, despite the settlement, your favorite plastic providers might emerge relatively unscathed.
Ever wonder how Visa and MasterCard's ironclad rules impact the retail battleground? Our latest conversation illuminates the 'honor all cards' rule that's been ruffling feathers among retailers, and we dissect the chess game that major merchants play to avoid hefty fees. As we navigate the potential consequences of landmark lawsuits and legislative changes, we're contemplating the future of digital wallets and the payment ecosystem. Smaller retailers might find themselves in choppy waters, but for the behemoth merchants, it's an opportunity to sail smoothly through the tempestuous seas of financial change.
We wrap up with a keen analysis of how businesses like Starbucks and ride-sharing giants are innovating to sidestep interchange fees with their own ingenious payment systems. Celebrating the strategic prowess of companies that sidestep these costs, we reflect on the broader implications for the fintech and payment industries. Join us as we forecast the ethical and financial waves that may arise from the evolving credit card reward structures and the innovative responses from banks and issuers to market dynamics. This isn't just a financial deep-dive — it's a mirror to the future of how we'll all spend and save.
Hosts: Sam Maule & Maia Bittner
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Sam Maule (00:03):
This is Essential Audio.
Hey everybody, welcome to yetanother episode of Artificially
Intelligent.
I'm one of your co-hosts, SamMaul.
Maia Bittner (00:16):
And I'm your other co-host, Maia Bittner.
Today we are talking about oneof my absolute favorite topics
in fintech interchange fees, andthis is sparked by the recent
proposed settlement betweenmerchants and Visa and
MasterCard, and we're going todig into all the details and all
the impact with you guys today.
Sam Maule (00:37):
And you talk about drama, right, I mean this
lawsuit, I believe, has beengoing on 19 years, 19 years.
I wasn't even in my 40s whenthis lawsuit started.
That's saying a lot 2005.
Maia Bittner (00:49):
Merchants have been battling this and it's
resulted- So about $30 billionis the estimated fee savings on
merchants, which is one of thelargest antitrust settlements in
US history.
Sam Maule (01:03):
Yeah, I mean, the highlights of this are
fascinating, right?
So you've got MasterCard andVisa.
They're going to reduce theircredit card processing fees for
US-issued consumer credit cards.
Let's make sure we say thatEvery merchant by at least four
basis points over the next threeyears and the cap is reduced
rates for five years.
The reduced rates must be atleast seven basis points below
(01:23):
the current average and thatwill be reviewed by an
independent auditor.
Can't wait to see who that endsup being so again this one's
pretty interesting.
I think the funniest part aboutall this Maya is.
Right before this show I lookedup MasterCard and Visa stock
and not even a blip Nothing.
Maia Bittner (01:40):
No one cares.
Sam Maule (01:41):
No steady state.
Well done Visa and MasterCard.
Maia Bittner (01:45):
Well, I want to.
You know, I think it's probablynot going to affect their
business that much, but, Sam, Iwant to kind of dig into the
details of interchange a littlebit.
Now I have an hour long talkthat I give on interchange fees
and how they work.
We're not going to go thatlevel of detail, but I do.
You know, I see people chattingon Twitter and I think that
there is a lot of confusion andthat it'd be helpful to cover
(02:08):
some background before we diginto the details and how things
understand.
So when people talk aboutinterchange fees right, so
interchange fees, which are thefees that merchants pay to visa
and MasterCard, that's whateveryone talks about and they're
like oh yeah, it's like 3% orlike 2.7% plus 30 cents or
something like that, right.
The thing is, when people saythat they're wrong on two
(02:33):
different ways, and well,they're wrong on everything
they've said.
And that really matters thedetails really matter when we
start getting into stuff likethat.
So, first of all, the merchantsare not paying the fees to Visa
and MasterCard, not quite likethat.
So, very technically, from avery technical perspective, the
acquiring bank is paying thatfee to the issuing bank.
(02:56):
Now, acquiring and issuingright, this is jargon, but if
you want people to think youknow what you're talking about
in the payment space, Irecommend you use this jargon.
But the acquiring bank, right,so that is the merchant's bank
account, it's their processingaccount.
The issuing bank is the onethat issues the credit card, and
(03:17):
so the reason why it matters isVisa.
And then it's sort of mediatedby Visa and Visa's at the middle
of setting these fees.
But they're part of thistri-party negotiation, right?
And so the way the fees are setis that Visa goes to merchants
and they say, hey, we are gonnacharge you the lowest
(03:39):
interchange fees if you routeyour cards over Visa and there's
all these details in that.
And the MasterCard says, no, no, we're going to be lower, and
everyone is competing for themerchants.
Because the merchants choose,yeah, the cards they accept.
Sorry, I got a little bitdistracted on routing Not
exactly routing, but basicallythey're negotiating with
merchants to accept their cardsand they want to give them as
(04:00):
low of fees as possible.
Then Visa and MasterCard turnaround and they go to the
issuers and they say hey guys,you should choose to issue your
cards on the MasterCard networkor the Visa network or whatever,
because we're going to pay youthe highest interchange, we have
the highest interchange ratesacross all the merchants for
your spend mix, your spendportfolio, and we're going to
pay you the highest.
(04:20):
And so they're trying to kindof play both sides there and
they're the intermediary andthey are facilitating the
negotiation, but they're justmaking some fees on top.
So I think that's part of thereason why it doesn't affect
their business that much.
Right, their business is involume.
They want to control thenetwork, they want the highest
volume of payments going overthem, but the interchange fees
(04:43):
themselves are not thatimportant volume of payments
going over them.
Sam Maule (04:46):
But the interchange fees themselves are not that
important.
And to put that just again, sowe can talk about duopoly oh my
God, my mouth.
I think I got the word outcorrectly.
It's not a monopoly, it'sduopoly.
Fees on MasterCard account formore than 80% of the US credit
card network.
So you got that well north of80%.
It's roughly about 576 millioncards.
That came out of a study doneback in 2023.
(05:09):
But they are the networks, justbottom line.
They are the networks.
Maia Bittner (05:16):
And so they have a lot of control here and they're
trying to close all thecustomers.
The other thing is when peoplesay something like 2.7 percent
um, it really obfuscates all thenuance there.
So interchange rates depend ona ton of different variables.
So they depend on it's calledyour card entry method, that's,
(05:38):
if you swipe your card versuschip authenticated, um versus
EMV or contactless right, emv ischip.
It depends on how youauthenticate the transaction.
So if it's pin authenticatedversus signature authenticated,
it depends if the card ispresent or not present.
Sam Maule (05:57):
Basically risk scores , if you're looking at that.
Maia Bittner (05:59):
So Sam, you're nailing it Like it's all about
risk and fraud, and actuallyVisa calls it the interchange
reimbursement fee.
And the reason they call itreimbursement is the whole
premise of interchange is thatissuers cover fraud costs, all
that stuff.
You know how.
You see, you're never liablefor any unauthorized transaction
(06:20):
on your MasterCard or on yourVisa.
It's because your issuer paysfor it, right?
So?
So if you have a Chase creditcard, chase is paying for any of
that.
They are getting reimbursed forthose costs.
That they're covering from themerchants is sort of the premise
.
And so riskier transactionsgenerally have higher
interchange fees.
Credit is higher than debitbecause it's riskier, somebody
(06:43):
might not pay back their thing,et cetera.
Signature is higher interchangethan PIN.
Card not present is higherinterchange than card present.
Sam Maule (06:51):
And, professor Bittner, one other term, if you
don't mind giving a definitionto, is around MDR.
If you could do that, thebeautiful merchant discount.
Maia Bittner (06:58):
No, you've got to take that.
Sam Maule (07:00):
Yeah, well, I mean, that's where you get even a
bigger fee.
Right, I mean reality isbecause the issuers are setting
that.
Maia Bittner (07:07):
That's what?
Sam Maule (07:07):
when we got back to Durbin and trying to put caps
and all this it gets back to ohmy God, now I'm getting old 2010
, durbin.
I should know that date.
Maia Bittner (07:17):
I think, 2010,.
Sam Maule (07:18):
yeah, because it was kind of the line in the sand
right Because it's Dodd-Frankyeah 2010.
Right, because it's dodd frank.
Maia Bittner (07:29):
Yeah, 2010 or 2011 , yeah, yeah, don't, don't hold
us to that.
Everybody around that timeframe.
Well, and what I want to bringin about durban right, and
durban, I mean in our world infintech, we know about durban
because it's really created thislandscape where neobanks can
flourish um, they are chargingunlimited interchange, while the
big banks are limited to reallysmall interchange rates on
debit card transactions.
(07:49):
But I think the moreinteresting thing about Durban
for this particular lawsuit isthe whole point of Durban was it
was supposed to reduce pricesto consumers and increase debit
card acceptance rates in theUnited States, and I think that
we now have the conclusions thatit did neither of those things.
Sam Maule (08:11):
So it did not achieve its goals At all.
I mean none at all.
Maia Bittner (08:17):
Well, and I think with this settlement, antitrust
I mean the whole point ofantitrust is consumer protection
, right, how do we protectconsumers against these big
corporations?
My guess is that with that, thejudges I mean this doesn't yet
have judge like have a courtapproval, um, but my guess is
that the intention was probablyto lower prices, maybe create
(08:40):
some more transparency and, justlike durbin, I don't think that
this is going to do it.
Sam Maule (08:48):
Yeah, toward the end of the show, I want to do like a
running scorecard for Maya andget your feedback on, like, who
the major stakeholders are.
When we're talking aboutpayment flow, right, when we're
talking about this on merchantsand consumers and everything
else, and we call thisforeshadowing in movies.
When we talk about what was theeffect and we're going to talk
about consumers, um, in a littlebit, um, this also, um, if I've
(09:08):
read everything right aboutthis, um, this is going to kind
of kill out that honor all cardsyes uh take, which is another
fascinating thing to take a takea look at so what do we?
Maia Bittner (09:19):
mean by honor all cards my yeah, well, honor all
cards is really so.
Visa and MasterCard have theserules and basically what they
say is you know so Visa will sayso.
Visa credit cards are the mostcommon card in the world.
And what Visa says is they sayif you, as a merchant, decide to
accept Visa credit cards, anyVisa credit card, you must
(09:42):
accept all Visa cards.
And so that's.
Let them do some sneaky things.
Including people think thatAmex has the highest interchange
rates.
Well, no, no.
Visa has a new card.
It's called the Visa Infinite.
It's a product.
It generally has higherinterchange rates than Amex.
(10:03):
It's extremely high.
If merchants had their way, theywould not accept Visa Infinite
cards.
It's cards like your ChaseSapphire Reserve.
It's really fancy.
It's cards that give you greatrewards.
But they can't reject thosecards because of the honor all
cards.
If you want to take any Visacredit cards, you have to take
all Visa credit cards.
(10:24):
Now some merchants have sort ofwiggled around that because
what they've done like Kroger isan example here it doesn't
apply.
So if you take Visa debit cards, you're not required to take
all credit cards.
And so Kroger has done some bigexperiments as part of their
lawsuits with Visa, around onlyaccepting Visa debit cards,
(10:45):
which have much lowerinterchange fees, and not
accepting any credit cards,because you can do it that way.
But if you accept any Visacredit card, you would have to
accept all debit cards, which ofcourse merchants don't mind as
well as all the credit cards,and that's so if the scale of a
Kroger can pull that off right.
Well, exactly, we talked aboutthis with Walmart.
Sam Maule (11:02):
When you are a beast like that, you can get away with
it.
When you're a bodega or asmaller merchant, yeah, good
luck.
Maia Bittner (11:11):
Well, in this lawsuit it is probably going to
benefit those big merchants, andfor a couple of different
reasons, I also think, smallmerchants.
So they're much more likely tobe paying a blended price to
their acquiring bank, to theirissuing processor, right.
The merchant discount ratebundles all these different
things into their bankingrelationship.
(11:31):
The big merchants, particularlyreally cost-conscious, really
savvy merchants like Kroger andlike Walmart, understand every
single line of their COGS andare very good at negotiating
that.
They have negotiated specialdeals with the card networks, um
, already, and they're the onesthat are going to benefit.
(11:52):
I think they're trying todeflect um that.
I think I saw 90 of themerchants in the recent case
against visa and mastercard aresmall merchants.
Well, of course, if you countby merchants, most of them are
going to be small merchants.
Counting by merchants is astupid way to count.
You should be counting bytransaction volume in which case
(12:12):
it's mostly going to be really.
I mean at Walmart.
I know that Home Depot has alsobeen cranky about the fees that
they're paying.
There's like a couple sort oflike flagship big merchants that
have been leading this case.
Sam Maule (12:26):
This makes me laugh.
I did a back when I was at theLevin FS.
I did this whiteboard sessionwhen I was talking about banks
in the US, right, because it'salways fascinating when you're
in Europe and they're like waita minute, there's how many banks
in the US in credit unions.
Maia Bittner (12:37):
There's so many banks.
Sam Maule (12:39):
We got like 10, and I said but please understand,
almost all of the deposits areheld by like 20 banks and even
though those 20, about four,it's really the four.
Maia Bittner (12:49):
And then even right, we're talking about the
merchant side.
It's like dude, like Chase,chase is on both sides.
They're a bit like they're oneof the top credit card issuers.
They're also one of the topprovider of merchant bank
accounts, like they do it allyou know.
Sam Maule (13:06):
Yeah, it's fascinating when you actually
dig.
Don't just get caught up innumbers, focus in on what really
matters and, like you said,let's get back to transaction
volumes.
Right, what's flowing throughthe pipes and from where and
who's doing it.
That's when you can see, allright, so who's going to benefit
from this and who isn't.
I mean, how do you think thisis going to affect?
(13:27):
This has always fascinated mein the US, because outside of
the US, especially like in Asia,we get to these super apps and
wallets and everything else.
And in the US, I mean Apple Payhas seen some growth, some
growth, google not so much.
But I mean, how do you thinkit's going to affect the wallets
?
Maia Bittner (13:52):
Well.
So one of the points of thislegislation is that merchants
can now discriminate amongstwallets.
So they could say we acceptSamsung Pay, but we don't accept
Apple Pay, and they can haveall these.
Now it's just you've got NFC ornot.
If anybody's got that littlecontactless symbol, you can use
your card in a contactless way,or you can use your phone to pay
with whatever wallet you use.
(14:12):
If this goes forward, if it'scourt approved, then it's going
to be mayhem and the merchantsare going to choose.
And here's the other reason whythat benefits big merchants.
Only big merchants are going tochoose.
And here's the other reason whythat benefits big merchants.
Only big merchants are going tobother to understand the impact
of accepting one wallet versusanother.
The bodega is still going toaccept everything.
They don't even know.
They're probably paying thesame regardless.
Any benefits in terms ofinterchange discounts are going
(14:33):
to be gobbled up by theirpayment processor and they're
not going to see it anyway.
But the big merchants are goingto do they could do really
annoying stuff with the wallets.
Now I'm not sure if they'llwant to.
So there's something.
So Apple Pay, specifically, isan interesting one.
Apple Pay actually charges theissuers, not the merchant a
surcharge for using cards withApple Pay.
(14:55):
So Apple Pay charges a half apenny for every single debit
card transaction to the issuer,and they charge 0.15% for every
single credit card transactionto the issuer.
So it's actually quiteexpensive for issuers if you're
using Apple Pay instead of usingyour card, and so that's an
impact.
(15:15):
I think the other walletscharge the merchants, and so we
might see that Apple Payactually gets more popular if
merchants can kick out the otherguys and charge more fees to
the issuers.
But I don't know, I'm curious,like how are they going to
implement this?
Like what is a point of salesystem going to look like?
Sam Maule (15:34):
Exactly, it's the devil's in the detail.
Right, you get this ruling, butagain, how do you you implement
?
This right off that one thingthat made me smile when I when I
saw this break is I got back tolike starbucks and uh target
with a red card, with these redcard that's an interesting card,
yeah brilliant brilliant talkabout future proofing yourself,
(15:57):
right?
um, both of them, just yeah, I'mapplauding them.
Y'all can't see me doing a golfclap because I don't want to
blow up my producer's ears, but,um, we always brag about how
brilliant starbucks is and againI'll say target the red card.
But they come out so well yetagain because this has zero
impact to them and a lot hasbeen talked about the starbucks.
Maia Bittner (16:18):
You know how starbucks is really a bank and
the starbucks card.
I will say like one littlenuance about why the details of
interchange fees matter.
So, interchange fees, they dohave both a fixed and a variable
component, right?
So I'm actually looking at theVisa USA consumer credit
interchange reimbursement feeschedule right now.
(16:40):
This is audio so you guys can'tsee this table, but I'm looking
at, okay, for education, right,visa Infinite, the fee is 2.15%
plus 10 cents and for VisaSignature it's 1.43% plus 5
cents.
But the important part isthere's a fixed component and
there's a variable component.
Okay, da-da-da-da Okay, words,math.
(17:02):
What does that really mean?
What that really means is thatinterchange fees are
disproportionately reallyexpensive for small dollar
transactions, right, merchantswho have small dollar
transactions are dying.
So who is that?
That's companies like Starbucks, where their average
transaction size is going to belike five bucks, right?
(17:23):
Because that fixed component isa higher percentage of the
overall thing and is reallykilling their margins.
And so Starbucks.
There's many reasons why theywant the Starbucks card.
There's many advantages, butone of them is that if they can
increase their averagetransaction size, say, you
reload your Starbucks card with$20 at a time instead of buying
lattes for $5 at a time From apercentage basis.
(17:46):
Starbucks is going to be payingmuch lower interchange fees
because of the higher ticketsize, and so that reduces their
costs.
Sam Maule (17:53):
Which also explains why if you go on your Starbucks
app and you go to reload, thedefault is $25, everybody.
Maia Bittner (17:59):
Exactly.
Sam Maule (18:00):
It's good design, Nothing wrong with that.
But there you go.
There's a lot of reasons whythey want the more money as
possible.
Maia Bittner (18:08):
But the interchange fees is definitely
part of that and you'll see itlike.
Uber right is another companythat has like a pretty small
average transaction size.
They do a couple of differentthings.
You might notice if you take alot of Ubers they'll roll up all
of the transactions, all therides you take, in one day and
to be one transaction on yourcredit card.
Boom, interchange fees at work.
(18:30):
They also have Uber Cash.
They're like load up your UberCash and you can pay for your
cars If you're like.
Why would I do that?
It's pretty great and easy tohave it straight through to my
credit card.
Again, interchange fees is theexplanation there.
Sam Maule (18:42):
I was smiling, I think right before we started
recording.
We kind of talked about this,remember, in those just early
days of fintech, right?
So 2010, 2011,.
You talk to any fintech andthey're all payments.
By the way, back then Everybodywas in payments or lending and
it was like so talk to me aboutyour business model, and it was
interchange fees, interchangefees, interchange fees.
(19:03):
Talk to him today.
Maia Bittner (19:07):
Well, I have a lot of explanations for that.
I still love interchange fees.
It's actually my favoritebusiness model.
I think it's a really uniquebusiness model because it allows
you to create a product acredit card or a debit card that
can be essentially free forconsumers.
I mean, it's free asterisk I'llget into the details there,
which I think the antitrustregulators care a lot about but
(19:30):
it's free for consumers.
And then the business modelyour revenue comes from
merchants, but because it'snegotiated by MasterCard and
Visa, the merchants don't have asay, right?
So when we think about Facebook, it's like Facebook creates a
product for end users.
Their real customers areadvertisers.
They're always having to meettheir advertisers' needs.
(19:52):
Do you know what I mean?
The advertisers are callingthem up.
It's a huge demand for issuingbanks, right?
Like you know, I've got myApple card on my desk Goldman
Sachs is an issuing bank.
I have this other card from astartup called Forma.
Blue Ridge Bank is an issuingbank.
So for issuing banks, they getall this revenue from the
acquiring bank, but they neverget a phone call from Costco.
(20:14):
They never get a phone callfrom Home Depot that's trying to
negotiate down.
It all gets kind of mediatedaway.
So I think it's actually likequite elegant and I think
there's.
Yeah, you got to.
You just got to worry about you, got to worry about your
margins and the other parts ofyour business.
We're not even talking about theRobinhood gold card now.
Sam Maule (20:32):
Oh yeah, oh God, that's a show we should there's
another one, we shoulddefinitely dive into.
See, we're coming up with ourown ideas everybody.
This is called rabbit holes inman Alive, fintech and payments.
There's just so many of them,it's a bit ridiculous, all right
.
So a friend of ours, ben Brown,shout out to Ben Brown, who's
(20:53):
now with Flagship they actuallyput together a wonderful
one-page cheat sheet and we'llwork with the producer and get
this out there.
On the whole ruling and whatcame through with this
settlement.
We're still waiting on thatruling, but they went through
and listed out the stakeholderswhen you talk about payments and
they rated their impact.
So red, green, yellow, maya.
(21:13):
So we're going to do theprofessor maya quiz and get your
opinion on these.
I'm going to name thestakeholder and you give me an
opinion on how big of an impactthis actual settlement was and
kind of your one or two bulletpoints.
Ok.
Maia Bittner (21:25):
All right.
Sam Maule (21:26):
Card issuers Red green Right.
Maia Bittner (21:30):
So for for card issuers, I'm going to go it's,
it's, it's, oh, it's fine, likeit is.
Technically it's, I think it'sfine.
I'm gonna go neutral.
It's bad because, um, this hasa slight, it has a very small
reduction in interchange revenue.
(21:50):
It's putting in some limitsthere, um, and then the limits
are limited to just a coupleyears and then they come back.
So like maybe I mean the bigissuers will see a tiny hit, but
to be honest it's not that bigof a deal.
I would say like there's somequestions.
So the bigger deal is ifpayment shift really does flow
(22:15):
away from those high interchangecards or this would be
devastating but to non-cardpayment methods like cash or
check, then that's going to havea bigger deal, a bigger impact
on the issuers.
But people love their creditcards.
I actually don't think themargins.
(22:35):
I think the margins for creditcards are about the same.
So for those really highrewards credit cards, they make
really high interchange but theypay it all out in rewards.
I don't know that their marginis that much bigger than for the
lower credit cards, where theyhave lower interchange fees and
minimal rewards.
It all kind of reaches a steadystate.
(22:57):
So my guess is that fees getcut a little bit, they cut
corresponding rewards a littlebit, and we end up in the same
place from an issuer perspective.
Sam Maule (23:03):
Yeah, and it's time boxed and it's one of those.
You know we'll be able to watchthis unfold, so we'll kind of
and I think, like anything else,there'll be some levers we can
probably tweak right.
I mean, because at the end ofthe day, we're the US consumers.
We love us a credit card Idon't I don't remember what.
The average?
What is the average number ofcredit cards now?
(23:24):
Is it six, seven?
I don't even know.
It's ridiculous.
I know that much we love mywallet's full of them.
So and a lot I could say.
All right, I think we bothagree on this one, but I'll say
it the networks, these inmastercard and amex.
We should throw amex anddiscover into the look.
What do you think impacts there?
I?
Maia Bittner (23:40):
I think again neutral.
I think it's going to be fine.
Like I said, they're makingmost of their revenue is fixed
fees per transaction, not thisinterchange percentage-based fee
.
So they're fine.
I don't know that they're goingto lose any issuers as
customers because of it.
(24:00):
I think maybe the reason we'renot talking about Amex and
Discover is because, right oftheir closed-loop structure and
the banks that are part of theopen-loop structure are really
important in this deal.
It lets merchants right.
They can.
(24:21):
They can actually I have to lookat my notes so they can
discount surcharges yeah, theycan discount by issuer so they
can say like, hey, chase cardsare going to be cheaper, um, and
so I think that this it's likewhy the banking part is really
important and this really kindof is mostly a Visa and
MasterCard issue and it's goingto affect Discover and Amex less
(24:43):
.
Sam Maule (24:43):
All right, you alluded to this, but let's get
the official ruling on this oneEnterprise merchants.
So the big ones, the big ones.
Maia Bittner (24:51):
This is huge.
I mean, this is their case.
They pretend I feel like theylooped in all of these.
Sam Maule (24:57):
They're on the golf course, high five at each other,
100, 100 they.
Maia Bittner (25:02):
I feel like they strong-armed a bunch of smaller
merchants in because they werelike, hey, aren't you guys sick
of paying interchange fees?
And the optics are good and theantitrust angle is good because
it's like, oh, visa andmastercard are beating up all
these small merchants, butreally it's like this is funded
by kroger and walmart and it'sbehemoths against behemoths.
(25:24):
It's Visa and MasterCard.
It's like some of the biggestbusinesses in the United States
are cranking at each other and Ido think those big businesses
one.
They're the ones that we shouldkeep an eye out for doing
interesting things at the pointof sale.
Are they going to start banningSamsung Pay?
Are they going to startsurcharging Visa Infinite cards?
Is it going to be weird if itsays look, you get a 50%
(25:47):
discount for all Chase cards,but then Visa Infinite, which is
your Chase Sapphire Reserve,costs 3% more, but your
Southwest Airlines credit card,which is also a Chase card, but
only Visa signature, unless youhave the non-business card and
then it's just Visa normal, isgoing to be right Like that's
terrible.
Nobody wants that.
But the bodegas won't do that,it's only going to be the big
(26:08):
merchants.
So I can't wait to see whatWalmart and Kroger and Home
Depot are going to do after thiscomes out.
Sam Maule (26:16):
But this reminds me of some of the early days, like
going back a little over adecade ago, in the early days of
money 2020, when walmart andand that group had mcx remember
mcx?
They were all going to gettogether and they were basically
going to beat the living tarout of visa and mastercard and
everyone else and they would goon stage in front of, and those
(26:37):
rooms would be packed five, sixthousand people.
And I remember them saying if we, if we went back and designed a
card network program, it wouldnot be at all what y'all are
doing and that's what we'redoing.
It never came to fruition,everybody, but you know, it's
just fascinating.
I remember that sitting thereand you just watch visa
(26:58):
mastercard sitting at the end ofthe panel and the walmart
people in the middle and it feltlike ali frazier is you know,
just this massive fight going onthe stage.
And that's when twitter wasexploding too, and I was one of
those geeks in the crowd going,oh and I couldn't, I couldn't
post fast enough.
I'm being set on stage and thenpaypal over in the corner, just
(27:19):
you know, slamming everybodyelse, which was funny too.
All those fun days of thosepacked rooms at money 2020 for
those keynotes, but that's thishas a feel of that like 10 years
later you know, and now you go,all right.
So by default we said theenterprise merchants.
We know they won.
The small businesses is ratherobvious, right?
(27:41):
I mean they're the onesprobably going to take a hit?
We don't know though we don'tknow what, to what level this
hit's going to be neutral, is it?
Maia Bittner (27:50):
honestly I don't think they're going to notice.
I think it's going to be justlike durbin, where their payment
processors pick up any anyextra margin from reduced
interchange costs.
They just keep paying the sameamount they've always paid.
They're not going to doanything finicky about where
accepting, you know, visasignature, but not Visa infinite
(28:12):
.
I think they're just going tokeep cruising.
Sam Maule (28:13):
All right, and then consumers, and for once I'm
going to say the one I think isgoing to be impacted are the
savvy credit card holders thatunderstand points that
understand.
You know you talked aboutSapphire, for example, and some
of these other cards with Chase.
You know these.
To me, I think those are theones where I don't know if
(28:34):
they're going to hireconsultants, but there's going
to be a lot of interestingmeetings going on in Chicago and
New York to talk about, okay,how do we rejigger these
programs?
Maia Bittner (28:42):
You know, I bet you're right and it might be
those consumers that feel theimpact.
Part of me says, like maybethat's not a bad thing.
I mean really like the way thatit works now is people with
shitty credit cards, which arethe ones have low interchange
fees and tends to be low incomepeople are subsidizing the
(29:06):
rewards for high-income people.
Do you know what I mean?
Like that's kind of how it'slike merchants pay for all
credit card processing, and theway that they subsidize it is
from paying higher prices at thegrocery store.
And I think, yeah, you know,like if people who are getting
2% cash back on everytransaction have to pay a
(29:27):
subsidy for that, I don't thinkprices are going to go down,
which I'm sure is what theantitrust people want.
I don't think they're going togo down.
But maybe maybe people withreally rich credit card rewards
start carrying their weight alittle bit more and they're not
as subsidized by low-incomepeople.
Sam Maule (29:43):
I think that's an excellent take, and it's one
when we started thisconversation I hadn't considered
to be honest, so I like howwe've come full circle on this.
I think it's a nice pivotalpoint in the credit card space
where we can get inventive again, and I'm looking forward to see
(30:04):
what the banks and the issuersdo around it.
I'm really actually excited tosee what comes out in the next
year or so because of this andit it takes events like this to
sometimes get things going welland it'll be funny.
Maia Bittner (30:15):
I mean, you say like, oh, there's going to be
consultants and meetings and andmaybe the weird thing is right.
If so, let's say that krogercomes out and the Visa Infinite
card is surcharged an extra 2%.
It kind of makes Kroger looklike the bad guy from your
perspective.
You're like going there andyou're like, why are you
charging me more to use mypreferred credit card?
(30:36):
And it's really interesting.
So then what would Chase do inthat situation?
Because their customers aren'tgoing to be using their cards as
much because they don't want topay the surcharge.
It's kind of their fault, butit's kind of not under their
control because kroger is makingthe rules based on their
(30:58):
economics and so it putseveryone I mean this whole
tri-party negotiation thing well, plus you've got the consumers,
we've got four parties, and itmakes things, I think, slower
moving and more opaque, moreconfusing.
Sam Maule (31:11):
So, folks, usually when we close the show out, I'm
like where can people learn moreabout?
If you ever wanted to know whyyou should follow Maya, the past
30 minutes have been what younormally go to school for like I
don't know two semesters tounderstand this and you'll read
a million blogs on how paymentflows work and everything else.
(31:32):
Here's the bottom line thedevil's in the detail, and not
enough people understand thosedetails.
So with that, let's wrap up theshow for today.
One thing we'd love you to doalways give us a review, talk to
your friends about this andreach out to us.
And again, just like I said,follow Maya.
I don't know what else to tellyou.
(31:53):
Maya, best place, where do youwant them to reach out to you
and go?
For the love of God, come,speak to us and teach us about
interchange fees.
Maia Bittner (32:00):
On Twitter.
I'm talking about interchangeon Twitter all the time.
Yeah, happy to jam into thedetails of this stuff, there's
really smart, highly paidprofessionals who understand
this better than I do and aremaking the decisions.
That affects all of us at theend of the day.
So I think, yeah, it'simportant for us players to
(32:21):
understand the basics at least.
Follow me on Twitter.
It's at Maya B M-A-I-A-B.
You can DM me if you want.
Follow me on Twitter.
It's at Maya B M-A-I-A-B.
You can DM me if you want tojam more on Interchange.
Sam Maule (32:29):
And if you want to reach out to me to figure out
how you can reach out to MayaSam on LinkedIn, I'd be glad to
make that introduction.
Folks, thanks for listening andthanks for being excited about
the FinTech space, because it isstill, after all these years, a
lot of fun.
Thanks for listening.
This is Essential Audio.
Hey everybody, welcome to yetanother episode of Artificially
Intelligent.
I'm one of your co-hosts, SamMaul.
Maia Bittner (00:16):
And I'm your other co-host, Maia Bittner.
Today we are talking about oneof my absolute favorite topics
in fintech interchange fees, andthis is sparked by the recent
proposed settlement betweenmerchants and Visa and
MasterCard, and we're going todig into all the details and all
the impact with you guys today.
Sam Maule (00:37):
And you talk about drama, right, I mean this
lawsuit, I believe, has beengoing on 19 years, 19 years.
I wasn't even in my 40s whenthis lawsuit started.
That's saying a lot 2005.
Maia Bittner (00:49):
Merchants have been battling this and it's
resulted- So about $30 billionis the estimated fee savings on
merchants, which is one of thelargest antitrust settlements in
US history.
Sam Maule (01:03):
Yeah, I mean, the highlights of this are
fascinating, right?
So you've got MasterCard andVisa.
They're going to reduce theircredit card processing fees for
US-issued consumer credit cards.
Let's make sure we say thatEvery merchant by at least four
basis points over the next threeyears and the cap is reduced
rates for five years.
The reduced rates must be atleast seven basis points below
(01:23):
the current average and thatwill be reviewed by an
independent auditor.
Can't wait to see who that endsup being so again this one's
pretty interesting.
I think the funniest part aboutall this Maya is.
Right before this show I lookedup MasterCard and Visa stock
and not even a blip Nothing.
Maia Bittner (01:40):
No one cares.
Sam Maule (01:41):
No steady state.
Well done Visa and MasterCard.
Maia Bittner (01:45):
Well, I want to.
You know, I think it's probablynot going to affect their
business that much, but, Sam, Iwant to kind of dig into the
details of interchange a littlebit.
Now I have an hour long talkthat I give on interchange fees
and how they work.
We're not going to go thatlevel of detail, but I do.
You know, I see people chattingon Twitter and I think that
there is a lot of confusion andthat it'd be helpful to cover
(02:08):
some background before we diginto the details and how things
understand.
So when people talk aboutinterchange fees right, so
interchange fees, which are thefees that merchants pay to visa
and MasterCard, that's whateveryone talks about and they're
like oh yeah, it's like 3% orlike 2.7% plus 30 cents or
something like that, right.
The thing is, when people saythat they're wrong on two
(02:33):
different ways, and well,they're wrong on everything
they've said.
And that really matters thedetails really matter when we
start getting into stuff likethat.
So, first of all, the merchantsare not paying the fees to Visa
and MasterCard, not quite likethat.
So, very technically, from avery technical perspective, the
acquiring bank is paying thatfee to the issuing bank.
(02:56):
Now, acquiring and issuingright, this is jargon, but if
you want people to think youknow what you're talking about
in the payment space, Irecommend you use this jargon.
But the acquiring bank, right,so that is the merchant's bank
account, it's their processingaccount.
The issuing bank is the onethat issues the credit card, and
(03:17):
so the reason why it matters isVisa.
And then it's sort of mediatedby Visa and Visa's at the middle
of setting these fees.
But they're part of thistri-party negotiation, right?
And so the way the fees are setis that Visa goes to merchants
and they say, hey, we are gonnacharge you the lowest
(03:39):
interchange fees if you routeyour cards over Visa and there's
all these details in that.
And the MasterCard says, no, no, we're going to be lower, and
everyone is competing for themerchants.
Because the merchants choose,yeah, the cards they accept.
Sorry, I got a little bitdistracted on routing Not
exactly routing, but basicallythey're negotiating with
merchants to accept their cardsand they want to give them as
(04:00):
low of fees as possible.
Then Visa and MasterCard turnaround and they go to the
issuers and they say hey guys,you should choose to issue your
cards on the MasterCard networkor the Visa network or whatever,
because we're going to pay youthe highest interchange, we have
the highest interchange ratesacross all the merchants for
your spend mix, your spendportfolio, and we're going to
pay you the highest.
(04:20):
And so they're trying to kindof play both sides there and
they're the intermediary andthey are facilitating the
negotiation, but they're justmaking some fees on top.
So I think that's part of thereason why it doesn't affect
their business that much.
Right, their business is involume.
They want to control thenetwork, they want the highest
volume of payments going overthem, but the interchange fees
(04:43):
themselves are not thatimportant volume of payments
going over them.
Sam Maule (04:46):
But the interchange fees themselves are not that
important.
And to put that just again, sowe can talk about duopoly oh my
God, my mouth.
I think I got the word outcorrectly.
It's not a monopoly, it'sduopoly.
Fees on MasterCard account formore than 80% of the US credit
card network.
So you got that well north of80%.
It's roughly about 576 millioncards.
That came out of a study doneback in 2023.
(05:09):
But they are the networks, justbottom line.
They are the networks.
Maia Bittner (05:16):
And so they have a lot of control here and they're
trying to close all thecustomers.
The other thing is when peoplesay something like 2.7 percent
um, it really obfuscates all thenuance there.
So interchange rates depend ona ton of different variables.
So they depend on it's calledyour card entry method, that's,
(05:38):
if you swipe your card versuschip authenticated, um versus
EMV or contactless right, emv ischip.
It depends on how youauthenticate the transaction.
So if it's pin authenticatedversus signature authenticated,
it depends if the card ispresent or not present.
Sam Maule (05:57):
Basically risk scores , if you're looking at that.
Maia Bittner (05:59):
So Sam, you're nailing it Like it's all about
risk and fraud, and actuallyVisa calls it the interchange
reimbursement fee.
And the reason they call itreimbursement is the whole
premise of interchange is thatissuers cover fraud costs, all
that stuff.
You know how.
You see, you're never liablefor any unauthorized transaction
(06:20):
on your MasterCard or on yourVisa.
It's because your issuer paysfor it, right?
So?
So if you have a Chase creditcard, chase is paying for any of
that.
They are getting reimbursed forthose costs.
That they're covering from themerchants is sort of the premise
.
And so riskier transactionsgenerally have higher
interchange fees.
Credit is higher than debitbecause it's riskier, somebody
(06:43):
might not pay back their thing,et cetera.
Signature is higher interchangethan PIN.
Card not present is higherinterchange than card present.
Sam Maule (06:51):
And, professor Bittner, one other term, if you
don't mind giving a definitionto, is around MDR.
If you could do that, thebeautiful merchant discount.
Maia Bittner (06:58):
No, you've got to take that.
Sam Maule (07:00):
Yeah, well, I mean, that's where you get even a
bigger fee.
Right, I mean reality isbecause the issuers are setting
that.
Maia Bittner (07:07):
That's what?
Sam Maule (07:07):
when we got back to Durbin and trying to put caps
and all this it gets back to ohmy God, now I'm getting old 2010
, durbin.
I should know that date.
Maia Bittner (07:17):
I think, 2010,.
Sam Maule (07:18):
yeah, because it was kind of the line in the sand
right Because it's Dodd-Frankyeah 2010.
Right, because it's dodd frank.
Maia Bittner (07:29):
Yeah, 2010 or 2011 , yeah, yeah, don't, don't hold
us to that.
Everybody around that timeframe.
Well, and what I want to bringin about durban right, and
durban, I mean in our world infintech, we know about durban
because it's really created thislandscape where neobanks can
flourish um, they are chargingunlimited interchange, while the
big banks are limited to reallysmall interchange rates on
debit card transactions.
(07:49):
But I think the moreinteresting thing about Durban
for this particular lawsuit isthe whole point of Durban was it
was supposed to reduce pricesto consumers and increase debit
card acceptance rates in theUnited States, and I think that
we now have the conclusions thatit did neither of those things.
Sam Maule (08:11):
So it did not achieve its goals At all.
I mean none at all.
Maia Bittner (08:17):
Well, and I think with this settlement, antitrust
I mean the whole point ofantitrust is consumer protection
, right, how do we protectconsumers against these big
corporations?
My guess is that with that, thejudges I mean this doesn't yet
have judge like have a courtapproval, um, but my guess is
that the intention was probablyto lower prices, maybe create
(08:40):
some more transparency and, justlike durbin, I don't think that
this is going to do it.
Sam Maule (08:48):
Yeah, toward the end of the show, I want to do like a
running scorecard for Maya andget your feedback on, like, who
the major stakeholders are.
When we're talking aboutpayment flow, right, when we're
talking about this on merchantsand consumers and everything
else, and we call thisforeshadowing in movies.
When we talk about what was theeffect and we're going to talk
about consumers, um, in a littlebit, um, this also, um, if I've
(09:08):
read everything right aboutthis, um, this is going to kind
of kill out that honor all cardsyes uh take, which is another
fascinating thing to take a takea look at so what do we?
Maia Bittner (09:19):
mean by honor all cards my yeah, well, honor all
cards is really so.
Visa and MasterCard have theserules and basically what they
say is you know so Visa will sayso.
Visa credit cards are the mostcommon card in the world.
And what Visa says is they sayif you, as a merchant, decide to
accept Visa credit cards, anyVisa credit card, you must
(09:42):
accept all Visa cards.
And so that's.
Let them do some sneaky things.
Including people think thatAmex has the highest interchange
rates.
Well, no, no.
Visa has a new card.
It's called the Visa Infinite.
It's a product.
It generally has higherinterchange rates than Amex.
(10:03):
It's extremely high.
If merchants had their way, theywould not accept Visa Infinite
cards.
It's cards like your ChaseSapphire Reserve.
It's really fancy.
It's cards that give you greatrewards.
But they can't reject thosecards because of the honor all
cards.
If you want to take any Visacredit cards, you have to take
all Visa credit cards.
(10:24):
Now some merchants have sort ofwiggled around that because
what they've done like Kroger isan example here it doesn't
apply.
So if you take Visa debit cards, you're not required to take
all credit cards.
And so Kroger has done some bigexperiments as part of their
lawsuits with Visa, around onlyaccepting Visa debit cards,
(10:45):
which have much lowerinterchange fees, and not
accepting any credit cards,because you can do it that way.
But if you accept any Visacredit card, you would have to
accept all debit cards, which ofcourse merchants don't mind as
well as all the credit cards,and that's so if the scale of a
Kroger can pull that off right.
Well, exactly, we talked aboutthis with Walmart.
Sam Maule (11:02):
When you are a beast like that, you can get away with
it.
When you're a bodega or asmaller merchant, yeah, good
luck.
Maia Bittner (11:11):
Well, in this lawsuit it is probably going to
benefit those big merchants, andfor a couple of different
reasons, I also think, smallmerchants.
So they're much more likely tobe paying a blended price to
their acquiring bank, to theirissuing processor, right.
The merchant discount ratebundles all these different
things into their bankingrelationship.
(11:31):
The big merchants, particularlyreally cost-conscious, really
savvy merchants like Kroger andlike Walmart, understand every
single line of their COGS andare very good at negotiating
that.
They have negotiated specialdeals with the card networks, um
, already, and they're the onesthat are going to benefit.
(11:52):
I think they're trying todeflect um that.
I think I saw 90 of themerchants in the recent case
against visa and mastercard aresmall merchants.
Well, of course, if you countby merchants, most of them are
going to be small merchants.
Counting by merchants is astupid way to count.
You should be counting bytransaction volume in which case
(12:12):
it's mostly going to be really.
I mean at Walmart.
I know that Home Depot has alsobeen cranky about the fees that
they're paying.
There's like a couple sort oflike flagship big merchants that
have been leading this case.
Sam Maule (12:26):
This makes me laugh.
I did a back when I was at theLevin FS.
I did this whiteboard sessionwhen I was talking about banks
in the US, right, because it'salways fascinating when you're
in Europe and they're like waita minute, there's how many banks
in the US in credit unions.
Maia Bittner (12:37):
There's so many banks.
Sam Maule (12:39):
We got like 10, and I said but please understand,
almost all of the deposits areheld by like 20 banks and even
though those 20, about four,it's really the four.
Maia Bittner (12:49):
And then even right, we're talking about the
merchant side.
It's like dude, like Chase,chase is on both sides.
They're a bit like they're oneof the top credit card issuers.
They're also one of the topprovider of merchant bank
accounts, like they do it allyou know.
Sam Maule (13:06):
Yeah, it's fascinating when you actually
dig.
Don't just get caught up innumbers, focus in on what really
matters and, like you said,let's get back to transaction
volumes.
Right, what's flowing throughthe pipes and from where and
who's doing it.
That's when you can see, allright, so who's going to benefit
from this and who isn't.
I mean, how do you think thisis going to affect?
(13:27):
This has always fascinated mein the US, because outside of
the US, especially like in Asia,we get to these super apps and
wallets and everything else.
And in the US, I mean Apple Payhas seen some growth, some
growth, google not so much.
But I mean, how do you thinkit's going to affect the wallets
?
Maia Bittner (13:52):
Well.
So one of the points of thislegislation is that merchants
can now discriminate amongstwallets.
So they could say we acceptSamsung Pay, but we don't accept
Apple Pay, and they can haveall these.
Now it's just you've got NFC ornot.
If anybody's got that littlecontactless symbol, you can use
your card in a contactless way,or you can use your phone to pay
with whatever wallet you use.
(14:12):
If this goes forward, if it'scourt approved, then it's going
to be mayhem and the merchantsare going to choose.
And here's the other reason whythat benefits big merchants.
Only big merchants are going tochoose.
And here's the other reason whythat benefits big merchants.
Only big merchants are going tobother to understand the impact
of accepting one wallet versusanother.
The bodega is still going toaccept everything.
They don't even know.
They're probably paying thesame regardless.
Any benefits in terms ofinterchange discounts are going
(14:33):
to be gobbled up by theirpayment processor and they're
not going to see it anyway.
But the big merchants are goingto do they could do really
annoying stuff with the wallets.
Now I'm not sure if they'llwant to.
So there's something.
So Apple Pay, specifically, isan interesting one.
Apple Pay actually charges theissuers, not the merchant a
surcharge for using cards withApple Pay.
(14:55):
So Apple Pay charges a half apenny for every single debit
card transaction to the issuer,and they charge 0.15% for every
single credit card transactionto the issuer.
So it's actually quiteexpensive for issuers if you're
using Apple Pay instead of usingyour card, and so that's an
impact.
(15:15):
I think the other walletscharge the merchants, and so we
might see that Apple Payactually gets more popular if
merchants can kick out the otherguys and charge more fees to
the issuers.
But I don't know, I'm curious,like how are they going to
implement this?
Like what is a point of salesystem going to look like?
Sam Maule (15:34):
Exactly, it's the devil's in the detail.
Right, you get this ruling, butagain, how do you you implement
?
This right off that one thingthat made me smile when I when I
saw this break is I got back tolike starbucks and uh target
with a red card, with these redcard that's an interesting card,
yeah brilliant brilliant talkabout future proofing yourself,
(15:57):
right?
um, both of them, just yeah, I'mapplauding them.
Y'all can't see me doing a golfclap because I don't want to
blow up my producer's ears, but,um, we always brag about how
brilliant starbucks is and againI'll say target the red card.
But they come out so well yetagain because this has zero
impact to them and a lot hasbeen talked about the starbucks.
Maia Bittner (16:18):
You know how starbucks is really a bank and
the starbucks card.
I will say like one littlenuance about why the details of
interchange fees matter.
So, interchange fees, they dohave both a fixed and a variable
component, right?
So I'm actually looking at theVisa USA consumer credit
interchange reimbursement feeschedule right now.
(16:40):
This is audio so you guys can'tsee this table, but I'm looking
at, okay, for education, right,visa Infinite, the fee is 2.15%
plus 10 cents and for VisaSignature it's 1.43% plus 5
cents.
But the important part isthere's a fixed component and
there's a variable component.
Okay, da-da-da-da Okay, words,math.
(17:02):
What does that really mean?
What that really means is thatinterchange fees are
disproportionately reallyexpensive for small dollar
transactions, right, merchantswho have small dollar
transactions are dying.
So who is that?
That's companies like Starbucks, where their average
transaction size is going to belike five bucks, right?
(17:23):
Because that fixed component isa higher percentage of the
overall thing and is reallykilling their margins.
And so Starbucks.
There's many reasons why theywant the Starbucks card.
There's many advantages, butone of them is that if they can
increase their averagetransaction size, say, you
reload your Starbucks card with$20 at a time instead of buying
lattes for $5 at a time From apercentage basis.
(17:46):
Starbucks is going to be payingmuch lower interchange fees
because of the higher ticketsize, and so that reduces their
costs.
Sam Maule (17:53):
Which also explains why if you go on your Starbucks
app and you go to reload, thedefault is $25, everybody.
Maia Bittner (17:59):
Exactly.
Sam Maule (18:00):
It's good design, Nothing wrong with that.
But there you go.
There's a lot of reasons whythey want the more money as
possible.
Maia Bittner (18:08):
But the interchange fees is definitely
part of that and you'll see itlike.
Uber right is another companythat has like a pretty small
average transaction size.
They do a couple of differentthings.
You might notice if you take alot of Ubers they'll roll up all
of the transactions, all therides you take, in one day and
to be one transaction on yourcredit card.
Boom, interchange fees at work.
(18:30):
They also have Uber Cash.
They're like load up your UberCash and you can pay for your
cars If you're like.
Why would I do that?
It's pretty great and easy tohave it straight through to my
credit card.
Again, interchange fees is theexplanation there.
Sam Maule (18:42):
I was smiling, I think right before we started
recording.
We kind of talked about this,remember, in those just early
days of fintech, right?
So 2010, 2011,.
You talk to any fintech andthey're all payments.
By the way, back then Everybodywas in payments or lending and
it was like so talk to me aboutyour business model, and it was
interchange fees, interchangefees, interchange fees.
(19:03):
Talk to him today.
Maia Bittner (19:07):
Well, I have a lot of explanations for that.
I still love interchange fees.
It's actually my favoritebusiness model.
I think it's a really uniquebusiness model because it allows
you to create a product acredit card or a debit card that
can be essentially free forconsumers.
I mean, it's free asterisk I'llget into the details there,
which I think the antitrustregulators care a lot about but
(19:30):
it's free for consumers.
And then the business modelyour revenue comes from
merchants, but because it'snegotiated by MasterCard and
Visa, the merchants don't have asay, right?
So when we think about Facebook, it's like Facebook creates a
product for end users.
Their real customers areadvertisers.
They're always having to meettheir advertisers' needs.
(19:52):
Do you know what I mean?
The advertisers are callingthem up.
It's a huge demand for issuingbanks, right?
Like you know, I've got myApple card on my desk Goldman
Sachs is an issuing bank.
I have this other card from astartup called Forma.
Blue Ridge Bank is an issuingbank.
So for issuing banks, they getall this revenue from the
acquiring bank, but they neverget a phone call from Costco.
(20:14):
They never get a phone callfrom Home Depot that's trying to
negotiate down.
It all gets kind of mediatedaway.
So I think it's actually likequite elegant and I think
there's.
Yeah, you got to.
You just got to worry about you, got to worry about your
margins and the other parts ofyour business.
We're not even talking about theRobinhood gold card now.
Sam Maule (20:32):
Oh yeah, oh God, that's a show we should there's
another one, we shoulddefinitely dive into.
See, we're coming up with ourown ideas everybody.
This is called rabbit holes inman Alive, fintech and payments.
There's just so many of them,it's a bit ridiculous, all right
.
So a friend of ours, ben Brown,shout out to Ben Brown, who's
(20:53):
now with Flagship they actuallyput together a wonderful
one-page cheat sheet and we'llwork with the producer and get
this out there.
On the whole ruling and whatcame through with this
settlement.
We're still waiting on thatruling, but they went through
and listed out the stakeholderswhen you talk about payments and
they rated their impact.
So red, green, yellow, maya.
(21:13):
So we're going to do theprofessor maya quiz and get your
opinion on these.
I'm going to name thestakeholder and you give me an
opinion on how big of an impactthis actual settlement was and
kind of your one or two bulletpoints.
Ok.
Maia Bittner (21:25):
All right.
Sam Maule (21:26):
Card issuers Red green Right.
Maia Bittner (21:30):
So for for card issuers, I'm going to go it's,
it's, it's, oh, it's fine, likeit is.
Technically it's, I think it'sfine.
I'm gonna go neutral.
It's bad because, um, this hasa slight, it has a very small
reduction in interchange revenue.
(21:50):
It's putting in some limitsthere, um, and then the limits
are limited to just a coupleyears and then they come back.
So like maybe I mean the bigissuers will see a tiny hit, but
to be honest it's not that bigof a deal.
I would say like there's somequestions.
So the bigger deal is ifpayment shift really does flow
(22:15):
away from those high interchangecards or this would be
devastating but to non-cardpayment methods like cash or
check, then that's going to havea bigger deal, a bigger impact
on the issuers.
But people love their creditcards.
I actually don't think themargins.
(22:35):
I think the margins for creditcards are about the same.
So for those really highrewards credit cards, they make
really high interchange but theypay it all out in rewards.
I don't know that their marginis that much bigger than for the
lower credit cards, where theyhave lower interchange fees and
minimal rewards.
It all kind of reaches a steadystate.
(22:57):
So my guess is that fees getcut a little bit, they cut
corresponding rewards a littlebit, and we end up in the same
place from an issuer perspective.
Sam Maule (23:03):
Yeah, and it's time boxed and it's one of those.
You know we'll be able to watchthis unfold, so we'll kind of
and I think, like anything else,there'll be some levers we can
probably tweak right.
I mean, because at the end ofthe day, we're the US consumers.
We love us a credit card Idon't I don't remember what.
The average?
What is the average number ofcredit cards now?
(23:24):
Is it six, seven?
I don't even know.
It's ridiculous.
I know that much we love mywallet's full of them.
So and a lot I could say.
All right, I think we bothagree on this one, but I'll say
it the networks, these inmastercard and amex.
We should throw amex anddiscover into the look.
What do you think impacts there?
I?
Maia Bittner (23:40):
I think again neutral.
I think it's going to be fine.
Like I said, they're makingmost of their revenue is fixed
fees per transaction, not thisinterchange percentage-based fee
.
So they're fine.
I don't know that they're goingto lose any issuers as
customers because of it.
(24:00):
I think maybe the reason we'renot talking about Amex and
Discover is because, right oftheir closed-loop structure and
the banks that are part of theopen-loop structure are really
important in this deal.
It lets merchants right.
They can.
(24:21):
They can actually I have to lookat my notes so they can
discount surcharges yeah, theycan discount by issuer so they
can say like, hey, chase cardsare going to be cheaper, um, and
so I think that this it's likewhy the banking part is really
important and this really kindof is mostly a Visa and
MasterCard issue and it's goingto affect Discover and Amex less
(24:43):
.
Sam Maule (24:43):
All right, you alluded to this, but let's get
the official ruling on this oneEnterprise merchants.
So the big ones, the big ones.
Maia Bittner (24:51):
This is huge.
I mean, this is their case.
They pretend I feel like theylooped in all of these.
Sam Maule (24:57):
They're on the golf course, high five at each other,
100, 100 they.
Maia Bittner (25:02):
I feel like they strong-armed a bunch of smaller
merchants in because they werelike, hey, aren't you guys sick
of paying interchange fees?
And the optics are good and theantitrust angle is good because
it's like, oh, visa andmastercard are beating up all
these small merchants, butreally it's like this is funded
by kroger and walmart and it'sbehemoths against behemoths.
(25:24):
It's Visa and MasterCard.
It's like some of the biggestbusinesses in the United States
are cranking at each other and Ido think those big businesses
one.
They're the ones that we shouldkeep an eye out for doing
interesting things at the pointof sale.
Are they going to start banningSamsung Pay?
Are they going to startsurcharging Visa Infinite cards?
Is it going to be weird if itsays look, you get a 50%
(25:47):
discount for all Chase cards,but then Visa Infinite, which is
your Chase Sapphire Reserve,costs 3% more, but your
Southwest Airlines credit card,which is also a Chase card, but
only Visa signature, unless youhave the non-business card and
then it's just Visa normal, isgoing to be right Like that's
terrible.
Nobody wants that.
But the bodegas won't do that,it's only going to be the big
(26:08):
merchants.
So I can't wait to see whatWalmart and Kroger and Home
Depot are going to do after thiscomes out.
Sam Maule (26:16):
But this reminds me of some of the early days, like
going back a little over adecade ago, in the early days of
money 2020, when walmart andand that group had mcx remember
mcx?
They were all going to gettogether and they were basically
going to beat the living tarout of visa and mastercard and
everyone else and they would goon stage in front of, and those
(26:37):
rooms would be packed five, sixthousand people.
And I remember them saying if we, if we went back and designed a
card network program, it wouldnot be at all what y'all are
doing and that's what we'redoing.
It never came to fruition,everybody, but you know, it's
just fascinating.
I remember that sitting thereand you just watch visa
(26:58):
mastercard sitting at the end ofthe panel and the walmart
people in the middle and it feltlike ali frazier is you know,
just this massive fight going onthe stage.
And that's when twitter wasexploding too, and I was one of
those geeks in the crowd going,oh and I couldn't, I couldn't
post fast enough.
I'm being set on stage and thenpaypal over in the corner, just
(27:19):
you know, slamming everybodyelse, which was funny too.
All those fun days of thosepacked rooms at money 2020 for
those keynotes, but that's thishas a feel of that like 10 years
later you know, and now you go,all right.
So by default we said theenterprise merchants.
We know they won.
The small businesses is ratherobvious, right?
(27:41):
I mean they're the onesprobably going to take a hit?
We don't know though we don'tknow what, to what level this
hit's going to be neutral, is it?
Maia Bittner (27:50):
honestly I don't think they're going to notice.
I think it's going to be justlike durbin, where their payment
processors pick up any anyextra margin from reduced
interchange costs.
They just keep paying the sameamount they've always paid.
They're not going to doanything finicky about where
accepting, you know, visasignature, but not Visa infinite
(28:12):
.
I think they're just going tokeep cruising.
Sam Maule (28:13):
All right, and then consumers, and for once I'm
going to say the one I think isgoing to be impacted are the
savvy credit card holders thatunderstand points that
understand.
You know you talked aboutSapphire, for example, and some
of these other cards with Chase.
You know these.
To me, I think those are theones where I don't know if
(28:34):
they're going to hireconsultants, but there's going
to be a lot of interestingmeetings going on in Chicago and
New York to talk about, okay,how do we rejigger these
programs?
Maia Bittner (28:42):
You know, I bet you're right and it might be
those consumers that feel theimpact.
Part of me says, like maybethat's not a bad thing.
I mean really like the way thatit works now is people with
shitty credit cards, which arethe ones have low interchange
fees and tends to be low incomepeople are subsidizing the
(29:06):
rewards for high-income people.
Do you know what I mean?
Like that's kind of how it'slike merchants pay for all
credit card processing, and theway that they subsidize it is
from paying higher prices at thegrocery store.
And I think, yeah, you know,like if people who are getting
2% cash back on everytransaction have to pay a
(29:27):
subsidy for that, I don't thinkprices are going to go down,
which I'm sure is what theantitrust people want.
I don't think they're going togo down.
But maybe maybe people withreally rich credit card rewards
start carrying their weight alittle bit more and they're not
as subsidized by low-incomepeople.
Sam Maule (29:43):
I think that's an excellent take, and it's one
when we started thisconversation I hadn't considered
to be honest, so I like howwe've come full circle on this.
I think it's a nice pivotalpoint in the credit card space
where we can get inventive again, and I'm looking forward to see
(30:04):
what the banks and the issuersdo around it.
I'm really actually excited tosee what comes out in the next
year or so because of this andit it takes events like this to
sometimes get things going welland it'll be funny.
Maia Bittner (30:15):
I mean, you say like, oh, there's going to be
consultants and meetings and andmaybe the weird thing is right.
If so, let's say that krogercomes out and the Visa Infinite
card is surcharged an extra 2%.
It kind of makes Kroger looklike the bad guy from your
perspective.
You're like going there andyou're like, why are you
charging me more to use mypreferred credit card?
(30:36):
And it's really interesting.
So then what would Chase do inthat situation?
Because their customers aren'tgoing to be using their cards as
much because they don't want topay the surcharge.
It's kind of their fault, butit's kind of not under their
control because kroger is makingthe rules based on their
(30:58):
economics and so it putseveryone I mean this whole
tri-party negotiation thing well, plus you've got the consumers,
we've got four parties, and itmakes things, I think, slower
moving and more opaque, moreconfusing.
Sam Maule (31:11):
So, folks, usually when we close the show out, I'm
like where can people learn moreabout?
If you ever wanted to know whyyou should follow Maya, the past
30 minutes have been what younormally go to school for like I
don't know two semesters tounderstand this and you'll read
a million blogs on how paymentflows work and everything else.
(31:32):
Here's the bottom line thedevil's in the detail, and not
enough people understand thosedetails.
So with that, let's wrap up theshow for today.
One thing we'd love you to doalways give us a review, talk to
your friends about this andreach out to us.
And again, just like I said,follow Maya.
I don't know what else to tellyou.
(31:53):
Maya, best place, where do youwant them to reach out to you
and go?
For the love of God, come,speak to us and teach us about
interchange fees.
Maia Bittner (32:00):
On Twitter.
I'm talking about interchangeon Twitter all the time.
Yeah, happy to jam into thedetails of this stuff, there's
really smart, highly paidprofessionals who understand
this better than I do and aremaking the decisions.
That affects all of us at theend of the day.
So I think, yeah, it'simportant for us players to
(32:21):
understand the basics at least.
Follow me on Twitter.
It's at Maya B M-A-I-A-B.
You can DM me if you want.
Follow me on Twitter.
It's at Maya B M-A-I-A-B.
You can DM me if you want tojam more on Interchange.
Sam Maule (32:29):
And if you want to reach out to me to figure out
how you can reach out to MayaSam on LinkedIn, I'd be glad to
make that introduction.
Folks, thanks for listening andthanks for being excited about
the FinTech space, because it isstill, after all these years, a
lot of fun.
Thanks for listening.
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