The Hidden Monopoly Behind All Those Whizbang New Ways To Pay For Stuff

Merchants don't have much say in how they accept payment, and that's a big problem that gets passed onto consumers. LevelUp founder Seth Priebatsch takes a closer look.

I’m all for owning an entire strip of properties in the game of Monopoly, loading them with houses and hotels, and ruthlessly boxing out my opponent. Great in games. Bad in the real world. Even worse within the payments sector.

If payments (as defined for the purposes of this article as the act of moving money from a “Point A” to a “Point B”) were to be dominated by a single player, the entire economy would suffer. I think we can all agree with that in theory.

But, you say, thankfully that hasn't happened. And it hasn’t--for consumers. We're certainly presented with tons of choices. Should I get a Visa or a MasterCard? From my banking institution or Capital One? Maybe an American Express? Or a Discover card? Or just pay with PayPal online and forget the whole card thing? And thank heavens for the power of choice. If American Express were as dominant as Facebook within the social world, imagine the privacy concerns we'd have to face then.

But, behind the scenes on the merchant side, payments actually are an "infrastructural monopoly." Infrastructural monopolies are much less likely to earn the ire of regulators, because the impact is largely one-sided. In the case of payments, consumers have tons of options, but merchants do not.

Sure, businesses can pick which payment processor to use and terminal to swipe, but at the end of the day, they don't really have a choice about whether or not to accept credit cards. And, no matter what terminal or processor you use, your core infrastructure is still based on "credit cards," run by the duopolistic MasterCard and Visa hegemony. With upwards of 2.3 billion Visa cards and 1.5 billion MasterCards in circulation in 2011 processing a total of more than $11.5 trillion dollars (according to the Nilson report), merchants cannot afford to ignore these two companies.

The lack of a real alternative grants these two players extraordinary power. Accepting credit cards is kind of like the old Model T by Ford: you can have it in absolutely any color you want, so long as it's black.

The credit card companies have used this infrastructural monopoly wisely, at least as far as their shareholders are concerned. By strong-arming merchants for years into paying exorbitant interchange fees, credit cards have created a huge invisible tax on economy (to the tune of $50 billion a year).

Merchants are just starting to wake up to this monopoly and beginning to fight back. Durbin Legislation struck a powerful blow against the card companies on behalf of the merchants. And recently, merchants exacted a $7 billion settlement from the card companies.

But, there's a serious problem in the way. Instead of banding together to collaboratively kill this existing monopoly, merchants are in the midst of settling for yet another closed system that locks out the element of choice.

Old-guard point-of-sale (POS) systems, and even new ones like Square, are feeding yet another infrastructural monopoly. Merchants get basic access to the existing omnipresent credit card infrastructure along with potential features like loyalty or gift-cards, but only those offered by that POS company. Think about that for a second. A merchant is locked into all future features for their business based on a single company's roadmap.

Many of the newer age POS companies do offer APIs and house marketplaces for app developers to extend the value of the platform. Companies like Square don't offer an API (there existed at one point an API project on Github but it now appears to have been deprecated.

Let's bring it back to the consumer world for a moment. Imagine if you bought a phone and could only have one of the few wireless carrier approved apps? We were there once, and it sucked. Carriers used to micro-manage every last app, every last feature on your device. We hated it so much so that we made the first company to offer us even a hint of freedom the most valuable company in the world (Hint, it's Apple).

Funnily enough, we were also there (in a smaller way) last month with Apple Maps. And the world collectively lost its mind . (Probably because they couldn't get directions to find it again without Google Maps.) Luckily, Apple is actually a comparatively open ecosystem (versus the old carrier feature phones) and so within a month or two, we had our beloved Google Maps back.

Back to the merchant world we go, where there are hints of good news. Many members of both the old and new POS guard are starting to take a more open approach. Clover, Shopkeep, Revel, PosiTouch and many more are working to create a sort of marketplace ecosystem where merchants can choose exactly what features they want to implement, some made by the POS company, some by third party developers. Dare I call that ecosystem an "app store" at the payment layer? This is a powerful opportunity for POS companies, merchants, developers (and even consumers) to break the infrastructural monopoly.

We’re on the verge of a revolution at the point-of-sale, so it's critical that merchants begin to evaluate the choices that they make on one additional vector: openness. No longer should merchants accept an ecosystem just because it’s there and lets them accept a customer's payment today. Payment technology evolves almost daily, creating more opportunities for merchants to kick interchange fees, create new revenue opportunities and build better experiences for customers. It’s important that merchants make sure these options remain open to their business and that they continue to move forward, not sink backward into yet another invisible infrastructural monopoly.

[Flying Money: Feng Yu via Shutterstock]

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3 Comments

  • Ben Saren

    Great article Seth. Love the perspective and vision. Wondering what your thoughts are on the infrastructure itself. The reason it's called "interchange" is literally because old-school processors would literally meet up at highway interchanges and exchange payment slips. It would take days, even weeks, for credit cards to be processed. I'm oversimplifying a bit but the point is made. Things have obviously changed, the infrastructure is made up of ones and zeros. But my question is, isn't there some pretty awesome value to the infrastructure? Isn't it kind of awesome that a merchant can get an auth back on a consumer's credit card in under 3 seconds? Isn't it also kind of awesome that a merchant can get a settlement and deposit into their bank account often 24 hours later? The infrastructure is like the national highway system, no? Sure, the tolls can seem unreasonable, but if you want to get from point-A to point-B efficiently and in a regulated and maintained environment (speed limits, safety requirements, maintenance, emergency services, policing, etc.) isn't the toll worth it? And to be clear, I'm not defending the card networks, nor their fees - only pointing out what the fundamental value is in the infrastructure. Would love your 2 cents. Or should we make that 2 basis points? :)

  • Cloudtography.com

    The problem with interchange is when you walk into my shop and present your Credit Card, I don't know if I'm going to pay .5% to process that sale or 3.5%