Payment Wars: The Merchant-Bank Struggle for Control of Payment Systems (2007)

In recent years, the cost to merchants of accepting credit cards has risen dramatically without a corresponding increase in the benefits. This trend has sparked a wide-ranging struggle between merchants and banks, as merchants have begun to seek methods for limiting payment costs. The conflict is playing itself out in business practices, banking regulation, IPOs, corporate governance, corporate restructuring, bank mergers, and the largest private antitrust litigation in U.S. history. This article reviews the factors behind the struggle between merchants and banks and the strategies adopted by each, and uses the framework of the merchant-bank struggle to reevaluate the relationship between banking and commerce. The article argues that the extraordinary transactional and litigation energy being spent in this fight is likely for naught. Ultimately, the growth of national bank brands, technological developments, and innovative business models are likely to independently result in a radical reshaping of the payments world that will not only ease merchant-bank tensions, but also blur the distinction between banking and commerce. I. The Struggle Between Merchants and Banks for Control of Payment Systems Merchants and banks are currently engaged in a wide-ranging struggle for control over the costs of payment systems. The conflict is playing itself out in business practices, banking regulation, corporate governance, corporate restructuring, securities offerings, bank mergers, and the largest private antitrust litigation in history. Yet, it is possible that the extraordinary energy being spent in this fight is for naught; the growth of national bank brands, technological developments, and innovative business models are likely to independently reshape the payments world and the general relationship between banking and commerce. This article begins with a review of the sources of the merchant-bank struggle, which stem from the structure and costs of payment systems. It then examines the various business and litigation strategies adopted by merchants and the responses by banks. It concludes by questioning whether changes in the payment card industry's structure and the emergence of new payments technologies and business models will make the merchant-bank contest moot. II. The Costs and Structure of Payment Systems A. The Relative Costs of Payment Systems At the core of the merchant-bank conflict is the fact that different consumer payment systems have different acceptance costs for merchants. Precise quantification of these costs is difficult and varies by merchant. These costs include fees paid by merchants to payment service providers as well as costs such as theft, insurance, and labor. Credit cards are by far the most expensive payment system, followed closely by signature-based (off-line) debit cards.1 Next come PIN-based (on-line) debit cards, then personal checks, then cash, and finally automated clearing house (ACH) transactions.2 A credit card transaction costs a typical retailer about six times as much as a cash transaction and twice as much as a check or PIN-based debit card transaction.3 While the cost to merchants of payment card (credit or debit) acceptance is only a few cents or dollars per transaction, these costs accumulate quickly. In 2006, U.S. merchants paid nearly $57 billion to accept payment card transactions,4 which makes this component of the payments industry larger than the entire biotech industry, the music industry, the microprocessor industry, the electronic game industry, Hollywood box office sales, and worldwide venture capital investments.5 Normally, when goods or services have different costs to merchants, the cost differences are reflected in the price charged to consumers. Payment systems are different. Merchants are unable to pass along the relative costs of different payment systems to consumers because the rules of the major payment card networks-MasterCard, Visa, American Express, and Discover-functionally require merchants to charge all consumers the same price, regardless of payment system. …