New Patterns of Power and Profit by Eric K. Clemons

Author:Eric K. Clemons
Language: eng
Format: epub
ISBN: 9783030004439
Publisher: Springer International Publishing

Power of the largest issuers. As the banks with these rewards programs grew even larger, they became even larger and even more important to MasterCard and Visa .

Increased payments by sellers for their participation in the system. MasterCard and Visa charge much higher fees to participating merchants. These highest rates are not imposed on all cards, but are associated with the most popular rewards cards, like frequent flyer miles and cash back rewards cards.

The structure of the lower three levels of Fig. 7.3 is strikingly similar to Fig. 7.1, which showed the flow of profits through the CRS platforms . Merchants have become dependent upon MasterCard and Visa as parallel monopoly credit card systems, just as airlines became dependent upon Sabre and Apollo as parallel monopoly reservations systems. We would expect to see the same sort of reverse price war in credit cards that we saw in airline reservations systems.

Once again, we do see a Reverse Price War. MasterCard and Visa independently increased the maximum amount that their members could charge to merchants. As they increased the amount that banks charged merchants, they increased the amount that they transferred from merchants to their member banks. This in turn allowed banks to increase the attractiveness of the rewards programs they offered to their cardholders. Increasing rewards led to pressure to compete by offering still-more-attractive rewards, which led to a greater need for funds from merchants and a further increase in the discount rate. As issuing banks competed for customer business, the amount charged to merchants increased. This is another example of competition increasing prices. Competition among banks increased rather than decreased the price that merchants pay for access to the credit card payment system.

Moreover, in some instances, merchants pass higher selling costs through to consumers, just as they would pass through higher costs for rent or for utilities, or higher prices charged by their own suppliers. In essence, all consumers are now paying slightly higher prices, and consumers with reward program credit cards are getting small subsidies from merchants and all other customers.

This does not actually imply that there are no limits on the charges that banks can impose on merchants and service providers that accept their credit cards. There are three separate sources of limitation, the same three sources of limitation we saw previously in Sect. 7.5. Bankruptcy threshold —The bankruptcy threshold suggests that if the cost to merchants for accepting the cards gets too high, merchants and service providers will go bankrupt as a result. If too many merchants and service providers fail, this will limit the market available to credit card issuers, and to all Party-2 players in all Third Party Payer Systems.

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