You may have heard recently about some major credit card issuers moving some of their cardholder customers to American Express (Amex) branded cards and away from VISA/Mastercard (V/MC). This move comes as a result of a recent court ruling ending V/MC restrictions which previously restrained issuers from issuing any other card brands. Now, issuers have a choice and can issue multiple brands if they choose to do so. Citibank and MBNA have announced that they intend to move some of their cardholders to Amex. They are making this move because Amex is more profitable for them due to its higher interchange and, because they want to have multiple card brands they can issue for diversification reasons.
    All that makes perfect sense. Who doesn’t want to make more money with the same cardholder base? Who wouldn’t want multiple brands which appeal to multiple cardholder bases? Who wouldn’t want to offer the upscale Amex brand as a benefit to consumers who can qualify for one?
    The question I have is, what does this mean for ISO’s? I don’t know about you, but I get less of a residual from an equivalent volume of Amex transactions than from the same volume of VISA/MC transactions – a lot less. What would happen if, say, 20% of all cardholders switched from VISA/MC to Amex over a two year period? It would hurt ISO residual streams for sure. There’s not really much an ISO can do about this, but it is something to watch. I expect overall residuals to decline about 7% over two years as a result of this change in the market. It’s not catastrophic, but it’s not helpful either.
    At the recent North East Acquirers Association, I spoke to Amex and MasterCard representatives about this issue. The Amex rep told me that while the whole switching concept is new, they are aware of the downstream consequences. They know that if they expect ISO’s to sell Amex for them, that they will have to improve the profitability of the product for ISO’s. But, there is no plan on the table today. (Editors note: Amex did not respond to follow up questions from TW as to the question and or content of such a plan. Cynthia) Amex is not as thoroughly penetrated into the merchant base as VISA/MC is, and that has to do with ISO’s hard work to get VISA/MC into millions of merchant locations. If Amex wants 100% penetration, they can get it if the necessary ISO sales effort is rewarded adequately.
    I asked the MasterCard rep about this issue and whether or not the competitive threat to the V/MC cardholder base worried the company. He said that this threat was the reason MasterCard interchange had gone up substantially in 2005, especially in Amex’s retail strongholds like entertainment, restaurants, rental cars and travel. In fact, if you look at the 2005 interchange tables (See Transaction World Magazine, March, 2005), you will see that the biggest increases are in these areas. And who gets interchange revenues? Issuers, of course. And who is thinking of shifting cardholders to Amex? Will this increase make them indifferent to Amex vs. V/MC?
    Clearly, MasterCard sees its customer as the issuing side of the business and not the merchant, ISOs, or the acquiring side of the business. To raise interchange purely to meet a competitive threat from AMEX within the issuing community is a one-sided move that won’t go down well with merchants or the ISO’s who serve them.
    This seems like a short sighted move to me, and represents a change in basic strategy for VISA/MasterCard. So far, the two brands have undercut AMEX interchange pricing and given the merchant a solid business reason to select the cards they will accept at the point-of-sale based on cost of processing. (I have been asked numerous times to use another form of payment other than Amex. Merchants can influence customer choices if they choose to do so.) This strategy has worked very well for years – hence the relatively lower penetration of Amex in the merchant base. Why change that now? The obvious answer is that issuing runs the world, including, indirectly, at least, the ISO world.
    One of these days, merchants will find a way to push back on interchange. It can’t go up forever. When they do figure out how to push back, watch out, things can change in a big way, as with the recent Wal-Mart debit case. The card brands ignore the merchants and ISO’s at their peril.