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Two sides to every story

on Thursday 19 November 2009

Capping credit-card levies on retailers and other merchants could hurt consumers

From The Economist print editionWHEN finance is not being blamed for wrecking the economy, it is being attacked for profiteering. Earlier this month the 7-Eleven chain of convenience stores in America presented a petition with more than 1.6m signatures to Congress, calling for a reduction of the fees levied by payment-card firms and their member banks each time a purchase is made using plastic. The House of Representatives is mulling a bill that would cap these “swipe fees”, known in the industry as merchant-interchange fees. In America these are 1.5-2% of the price of an average purchase, which is high by rich-world standards. Retailers grumble that the charges inflate their costs, which they are forced to pass on to consumers—even those who choose to pay by cash.

Similar complaints have already prompted regulatory action elsewhere. Visa and MasterCard, the payment-card giants, are fighting an attempt by the European Union to limit swipe fees to 0.3% of a transaction’s value whenever a credit card issued in one EU country is used in another. (Until two years ago the EU’s competition authorities had been pacified by Visa’s pledge to bring average interchange fees down to 0.7%.) In Australia, where regulators set charges in relation to the payment system’s running costs, the average swipe fee has fallen to around 0.4%.

The case for tight regulation seems strong, at first glance. In rich countries, where paying by plastic is now commonplace, the firms that run card-payment systems look like other utilities, which have long been subject to price caps. Visa and MasterCard are associations run on behalf of their member banks. Competition officials are usually wary of such shared ventures but accept that it is more efficient for rival banks to band together in one network in order to process payments and settle accounts. A common fee structure stops members from abusing the rule that retailers must take all cards issued with the association’s brand. It also obviates the need for countless bilateral deals between thousands of banks. Even so, regulators still fret that banks might use their combined heft to overcharge.

They need to tread carefully. Judging how much credit-card firms ought to charge for their services is trickier even than setting the right price for water or energy supplies. That is because the payment-card system is a “two-sided” market. What sets this type of enterprise apart is that it caters to two distinct groups of customers and each sort benefits the more custom there is from the other sort. Consumers will sign up for a credit-card brand if it is widely accepted as a means of payment. Merchants will more willingly accept a card if lots of consumers use it.

Building up a two-sided market, and balancing the needs of each side, require pricing strategies that would make little sense in more traditional, one-sided industries. Charges may have little relation to costs and often lean to one side of the market. For instance, outfits that act as matchmakers for lonely hearts (dating clubs, singles bars, and so on) often levy higher charges on men than on women. They judge that single men will be keener to join clubs that are visited by lots of women. Computer operating systems make more money from users than from software developers. Most media outfits rely on a mix of charges to both sides of the market that is tilted towards advertisers. Broadcast networks and some local newspapers provide their wares free and charge advertisers for access to consumers. Others are now opting for a one-sided business model, without advertisers, where consumers pay directly for news and programmes.

Skewed pricing is one solution to the central challenge of two-sided industries: how to lure one set of clients with the promise of custom from the other. In its early days, the Diners Club card took a hefty 7% cut of the tab from restaurants that accepted it. They did so because the eateries were given privileged access to the wealthy New Yorkers who had been given the card free. With one side on board, Diners Club found it easier to charge the other. As a rule, the side that bears more of the cost of bringing both sides together is the one that is least reluctant to pay—the side that Jean-Charles Rochet of Toulouse University, an expert in two-sided markets, describes as “caught”. But because finding the right mix of charges is so crucial to a successful two-sided business, regulating prices could upset a delicate balance. It is hard for firms to know what the “right” prices are in two-sided markets. Cut charges on one side and it will raise them on the other, chasing customers away and making the business shrink.

Not going Dutch

Trustbusters are nevertheless suspicious of a credit-card business model, where one side covers all of the running costs. That looks sinister on two counts. First, in mature markets merchants may have little choice but to take the main credit cards. If so, it may allow the big brands to overcharge, pushing merchants’ profits down and consumer prices up. Second, to the extent that card issuers use some of their excess profits from interchange fees to compete for cardholders—through lower fees, loyalty schemes and other benefits—a hefty swipe fee could distort the payments markets by favouring credit cards over other forms of settlement, such as debit cards, cheques or cash.

Even so, that does not add up to a compelling case for regulation, since it is hard to see how consumers could be made better off. The tentative evidence from Australia is that caps on interchange fees for retailers have not been offset by any gain in the form of lower consumer prices. If interchange fees merely shift economic rents from merchants to card firms, then that is not a concern for competition policy (especially if some of the rents end up washing back to cardholders). It is true that interchange fees facilitate credit-card usage, which can encourage indebtedness with all its attendant problems. That makes them a tempting target for crisis-burned regulators. But if consumer debt is the problem, tinkering with swipe fees is the wrong way to tackle it.

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Simple Economic Solutions

Nothing is ever simple in Washington DC; unfortunately our representative system clouds even the simplest challenge. Citizens need to understand that Congressional solutions are never about what is being debated in that body; it’s about re-election and maintaining a position of power.

Because those debates are about selfish interests, as opposed to solving problems, it confuses many people. Many of those people are the citizens we look to for answers, those people who report the daily news and informed guests on those shows. A refrain we hear constantly is, "we must help small business because they create most of the jobs". Helping small business by itself does not address the real problem, which is wealth creation.

Small businesses cover the whole spectrum of commerce, but only a few are wealth creating entities. Businesses that produce something are the wealth creators that support all the others, yes, an economy can be sustained by exchanging wealth, or re-distributing wealth, but it will remain stagnant unless there is new wealth created to allow growth. We will be unable to pay down our ridiculous debt without growth in the economy; it’s no different than trying to pay off your credit card when you don’t have a job.

Selfish government policies that punish wealth creators, and have sent most of those kinds of jobs to other countries, has occurred for many years and, unfortunately, it is accelerating. It is obvious that common sense solutions will never come from Washington. The greatest policy change, and simplest solution to our economic woes, would be to eliminate all business income tax that is merely a hidden tax on the consumer anyway. Those kinds of changes can never happen inside Washington’s catacombs because it destroys our representative’s ability to control our lives, and remain on their throne of power.

The most troubling part is the apparent confusion on the part of those we rely on for information, why do so many seem to not understand the concept of production and wealth creation? It would be wrong to stimulate unproductive small businesses because that is the thing that caused this financial mess in the first place. The only stimulation our economy needs is for government to get out of the way and stop impeding it. The economy is way out of balance with too few producers that can’t support the many non-producers.

Solutions will need to come from citizens, but a majority must be informed, and understand what the problem is, for that to happen. If we listen to our representatives, or many biased news sources, the simple solutions will never occur. The most unfortunate part is, this has all been created in Washington by design, and it’s very obvious that Congress has no intention of offering simple solutions.

Simple solutions to make central government smaller, increase production in the private sector, and return the creation of currency to the people instead of a private bank, will never happen because these are all creations of Congress to provide an advantage to them and their special interests.

If we are truly looking for simplicity, it’s unlikely we’ll find it in Washington. The dynasty that has been built there, over many years, is pretty much impenetrable, we are a Democracy in name only.

Our country had a similar experience in 1776 that called for a revolution, and revolution is called for today. A non-violent revolution by American Citizens is the only solution for our economy, and our country, but for that to happen we must understand the truth about our country. Smoke screens from Washington are making it difficult for the Paul Revere types, those who have the responsibility to provide us information, to clearly see the enemy coming.

One more obstacle is the fact that many people charged with the responsibility to inform us are in the enemy’s camp. I guess there are plenty of reasons why simple solutions are made complex, but to simplify it all, it’s nothing but greed on the part of our leadership, and complacency and indifference on the part of too many American Citizens.

Information is available at the Geezilschool.

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Running Your Own Business – 5 Tips For Dealing With Nightmare Clients

My favourite clients are people who are upbeat and positive, with a ‘can do’ attitude.

Whingers, moaners and complainers I find draining. You can spend an hour encouraging, enthusing, and inspiring them. Yet you can guarantee they’ll be back on the phone within a week right back where they started.

You’ll probably have a good intuition for the type of person you work with best. But occasionally, the odd nightmare client will slip through the net. Someone who started out charming starts being a nuisance and making unreasonable demands on your time.

Here are some tips for making sure YOU remain in charge – rather than them!

1. Trust your intuition. Sometimes you just have a hunch that a client is going to be a pain. You can’t put into words why. You just have a sixth sense about it. Trust these feelings and act on them.

2. Nip problems in the bud. If a client is a nuisance from the outset – say, complaining about your quote or prices, the simplest thing to do is send them a brief letter stating that you’re returning their cheque (or whatever they may have given you) so that they can explore other options elsewhere.

3. Set your boundaries early on. I once had a famous Hollywood actor as a client and made the mistake of giving him my home phone number. Early on in our working relationship, he called me on a weekend saying: “I just want 5 minutes of your time…” I was a bit star-struck, so I was happy to help. 90 minutes later, I was still trying to get off the phone. ‘Never mind’, I thought, ‘just a one-off.’ Except the same thing happened again a week later. I had made a mistake in not making my boundaries clear early on. It took a third call for me to realise the situation was getting out of hand. I then politely reminded him consultations were by appointment only during office hours – which he was happy to accept.

4. Increase your fees. One of my business friends has a policy of quoting 60% more for clients he suspects will be trouble! His thinking is that such clients are likely to take up more of his time and he wants to be financially compensated for it. Personally, I don’t think any amount of money makes up for the headache of a nuisance client, but if you’re more tolerant, this may be an option for you.

5. Make sure your actions are consistent. If you end a working relationship with a client, be firm but polite. Give a refund, if appropriate. At the same time, make sure you remove them from all your databases. The last thing you want is to keep sending them sales letters, mail-outs and autoresponders. They are unlikely to want further communication with you… and you certainly don’t want them coming back for further services.

All clients are different, so it’s important to weigh up your priorities. Decide what you’re prepared to tolerate, and what you’re prepared to let go. Nuisance clients can take their toll on your time and your health. The important thing to remember is that you don’t have to put up with them. It’s one of the great perks of having a business.





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The Banking Dilemma – Business Versus Technology

It never ceases to amaze me that in the world of banking two different worlds can seemingly co-exist side by side, each oblivious of the other. There are many examples of this, such as “sound risk management” versus “business imperatives”. This particular issue lies, in my view, at the heart of the current financial crisis.

However, we are probably too preoccupied with financial crisis issues at the moment, so I don’t want to dwell on this here. I would rather muse on another paradoxical situation which I often, as a consultant, find so very frustrating. This is the “world of technology” versus the “world of business”.

By its nature modern banking is technology driven. Data processing systems have made the huge volumes of transactions that occur each day as well as the supply of the mountainous volumes of data dealing with and supporting these transactions possible. Yet the transactions in question are all driven by business imperatives, always at the behest of the customer.

While generally bankers at the “business” end can see the interdependence between technology and banking, the same is not true for “bankers” at the “technology” end. Neither is it really true for infrastructure providers, be they domestic or international, such as payment system operators, ACHs, payment processors, messaging service providers and the like.
There is another, almost self destructive aspect to this inability of one side to understand the other. This is the inability of each element (technology and business) to either understand or to apply the skills of the other to create a harmonious whole that melds the technology with the business’ requirements and other needs.

By not doing things or by not doing them right how many opportunities are missed? I shudder to think.

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