Interchange fees, innovation & disintermediation

There has been a lot of debate on the level of interchange fees (aka merchant discount rates - the fees paid by the merchant for accepting an open loop network card), and the role it plays in fostering commerce.

Supporters, typically issuers, says it fosters innovation, increases sales at stores... Opponents, typically merchants, says that the fees paid by merchants are subsidizing issuers marketing programs. Interchange fees were not particularly controversial until the proliferation of reward cards. The interchange rates for reward cards are at least 20 basis points higher than for the basic card, and are therefore balked at by the merchants especially those that have slim margins.

In a world where intense competition is getting organizations to review every single expense, merchant's focus on interchange rates is not misplaced. In the 'old' days, merchants did not have much of a choice and came to terms with the world dictated by Visa/MasterCard.

However, new entrants are changing the landscape. Paypal, Amazon and Apple have tremendous market reach. They have the ability to be an alternative to the payment networks. This is already true for Paypal in the US ecommerce world. Amazon is well on its way as well.

It is not obvious to me that focus (or limits) on interchange rates implies reduced innovation. There is plenty of innovation taking place in the payments industry, outside of the realm of the traditional payment networks. This innovation is not being funded by interchange fees. Innovation will continue

Having said that, I agree that Congress must not try to mandate interchange rates and stifle the competitive nature of the payments industry.

Do you support limits on interchange rates? How does the disintermediation of payment networks in the online world extrapolate to the offline/retail world? Is iPhone providing a glimpse of what may be looming on the horizon?

Online Fraud Double Whammy

I am sure that you have heard about the startling discovery that a malware (Sinowal Trojan) has been harvesting financial data, including credit card numbers for nearly three years. The cache of stolen data exceeds half million records reports RSA FraudAction Research Lab.

On a related note, The New York Times reports

Microsoft plans to report on Monday that the security of its Windows operating system has significantly improved, while at the same time the threat of computer viruses, frauds and other online scourges has become much more serious.

News like the above are bad news for the online commerce industry. Especially, given the current mood of the consumer and economic environment. Improvements in technology can be leveraged to minimize the ability of fraudsters to profit from data collected by crimeware/malware.

A variety of participants, including CyberSource, Iovation, 41st Parameter have been working on combating this kind of fraud. However, what is becoming clear is that the fraudsters are a lot savvier and that we need to approach this problem very differently.

Call to action: Support the below technologies (some of which are already deployed for offline transactions) for online commerce transactions:

1. Support one-time credit card number, such as those offered by MasterCard in association with Orbiscom
2. Support use of dynamic CVx (CVV / CVC...)
3. Support multi-factor authentication, including utilizing CVM (Card holder verification) methods that are part of the current MasterCard and Visa specifications
   

The above advances will make the stolen information unusable. As credit card issue cycle is on average three years, the higher security cards will make it to the hands of the consumer over the course of the normal card replacement cycle. The cost differential of the higher security card will be made up by issuers if the consumer makes one additional transaction because of the higher security card.

Would love to hear about innovations that you are working on or are aware of that would remove the profitability from stolen data.