Why Killing Cash is Key to MasterCard’s Competitive Strategy

http://knowledge.wharton.upenn.edu/article/mastercard-competitive-strategy/

by bavcyc • 12 years ago

61 76 12 years ago

knowledge.wharton.upenn.edu

exo7624• 12 years ago

I pray for a day when this guys' power is torn away from their hands by Bitcoin. World with Mastercard instead of cash is a distopian nightmare. Ask Wikileaks.

doctorKrieger• 12 years ago

it's not like when the government removes cash people will turn to trading in gold or any other portable thing.

debrice• 12 years ago

So his argument is that it cost 0.5% to 1.5% of the GDP to have cash money... I believe the current visa processing fee is 1.51% plus $0.10

fennecfoxen2• 12 years ago

I believe most PIN-based payment systems end up being a lot cheaper than that, and since this is MasterCard we're talking about, maybe you should look at a network like Maestro (which is big in the EU). Unfortunately it's really hard to pin down exact rates with a casual Google search...

xxs3• 12 years ago

In Europe bank card retail purchases and most debit card withdrawals (some exceptions) are free.

opendais• 12 years ago

Well that his solution to the problem, isn't it? ;)

He wants that .5% to 1.5% to go to him instead!

ksec3• 12 years ago

Doesn't that depends on countries? Last time i heard the US credit card payment system was some ridiculously expensive rate at 2 - 3%.

fennecfoxen2• 12 years ago

The US rate for credit card (and check card) processing is indeed very high! The upside of this is that it makes a variety of financial firms (banks and credit card companies) quite interested in issuing them. For instance, some banks will offer no-fee bank accounts with direct deposit and a certain minimum number of monthly check-card purchases (in lieu of requiring larger minimum balances). Some providers will also explicitly send a significant fraction of these fees right back to the customer as "cash back", airline-miles, or similar rewards.

(The downside is obvious. The dynamics of the interplay are interesting. I wonder if there are any good studies.)

bediger40004• 12 years ago

You actually negotiate the interchange fee somewhere along the process of getting a merchant account. If you're a "Level 1" merchant you pay less and smaller merchants pay more, American Express and Discover charge more, if you're in a dodgy business coughPORNcough you pay quite a bit more. I think that Visa or MasterCard will increase your interchange fee if your customers do too many chargebacks and disputes, too.

I'm out of touch with that any more, but 1.75% used to be a very good interchange rate maybe 10 years ago.

needusername2• 12 years ago

Interchange is all over the place. It can easily go to 2.5%.

http://www.mastercard.com/us/company/en/whatwedo/interchange... http://www.mastercard.com/us/company/en/whatwedo/interchange... http://www.mastercard.us/merchants/support/interchange-rates... http://www.osc.nc.gov/secp/schedulec-visaandmastercardiqda.p...

The rules are very complicated and arbitrary. To give you an example: cashback interchange in Poland is negative (acquirer get money from the issuer), intradomain interchange is positive (issuer gets money from the acquirer) and interdomain interchange is zero.

There is no way explain interchange without using the words yacht, golf course, hookers and cocaine.

tormeh4• 12 years ago

We actually had a debate about this in Norway; removing cash completely. Only 2.7% of all Norwegian transactions are in cash, anyway. In Norway I can go for months without having any cash with me. Germany, where I live now, lives and breathes cash, which was very shocking when I came here.

xxs3• 12 years ago

I guess that heavily depends on the province you live in. In Berlin and Stuttgart I don't recall using much cash at all.

frik• 12 years ago

True. Cash is still the primary payment method in central Europe (Germany, Austria, Switzerland, etc).

With cash you always have the overview of how much you carry around in your wallet. Cash is also a proven anonymous payment method. ATM are available everywhere and usually free (no service fee).

On the other hand online payment (ebanking, paypal) is popular too (for online shopping).

All payment methods (incl cash) come with some hidden fees and/or operating costs. And all have advantages and disadvantages.

Let's hope that cash will survive for a long time to come.

mpweiher• 12 years ago

"With cash you always have the overview of how much you carry around in your wallet."

Also, when you spend, something is removed from your wallet.

_delirium2• 12 years ago

Denmark is having that debate as well. Currently stores doing in-person business must accept cash (part of the law on what constitutes legal tender). There's a proposal to let them go to card-only and not accept cash, but it hasn't passed.

One of the complications is that the only card some stores accept is Dankort, a Danish debit card system with low merchant fees (especially true of some small bars, coffee kiosks, etc.). So if they stop accepting cash, those places will effectively become limited to Danish residents. Today even if most customers pay with Dankort, a foreigner can always pay in cash.

jedberg• 12 years ago

Why is that a complication? Wouldn't it be up to the vendor if they want to lose the foreign business? Or are you saying that the government doesn't want it because they don't want to exclude foreigners?

ksec3• 12 years ago

2.7% of transaction!!! That is really an eye opener. What do Norwegian paid with? Debit Card? or NFC Credit based Cards?

tormeh4• 12 years ago

Debit, mostly Visa with a little Mastercard mixed in.

zo1• 12 years ago

Mods, please change the name of this submission. It is completely misleading. The linked article is titled: "Why Killing Cash is Key to Mastercard's Competitive Strategy".

On the other hand, if this was meant as click-bait, then go right ahead and not change the name. I'll just regret my click, and hopefully this comment will serve as a warning to other unsuspecting, curious individuals.

Edit: I see that the title has been changed. Thank you very much, mods!

bavcyc• 12 years ago

It was not meant as click bait.

To me the interesting portion of the article was the "Yes, if" instead of giving the answer of 'No.'

The tab in the browser says "Why Killing Cash is the Key to Mastercard's Competitive Strategy" but the title on the page is "MasterCard’s Ajay Banga: Why ‘Yes, If’ Is More Powerful Than Saying No." I typically don't pay attention to the title in the tabs.

Anyway, I found the comments on the article interesting even when the discussion went where I didn't expect.

cowbell• 12 years ago

The problem with "Yes, if.." is that the person asking only hears "Yes..." You better make sure the "if.." is in writing, with extra bold font. That, or you're stuck supporting IE6 with no budget or time to do so.

ethor2• 12 years ago

Purely noble motives regarding removing cash from society, right? It essentially gives international financial corporations oligopoly over commercial transactions.

And for those of you that cherish privacy, imagine the tracking possibilities in a society where commercial transactions no longer can be pursued anonymously.

ethor2• 12 years ago

Also, the governmental opportunity to revoke non-desirable citizens the privilege to make commercial transactions.

badman_ting• 12 years ago

Right, this strikes me as a situation with real potential for "the cure is worse than the disease".

clord• 12 years ago

This puts incredible power in the hands of the financial industry. It is the most clear evidence I've ever seen for the shape of the coming (already here?) plutocratic era.

milesf• 12 years ago

One word: Wikileaks.

MasterCard refused to process donations: http://observer.com/2010/12/card-declined-visa-mastercard-re...

Whether you agree with Julian Assange or not, the fact that democratically elected leaders in a democratic country tried to force a democratic society to _NOT_ support a cause by telling MasterCard "don't process these donations" was an incredibly chilling event.

xux• 12 years ago

How is that different from freezing someone's assets?

bediger40004• 12 years ago

It was sort of under the table, not done via regular, publicly visible means. It's prone to abuse. Asset freezing usually (always?) comes from a court order, which is generally done in public, with arguments from both sides.

Spooky233• 12 years ago

The payment processors can restrict your activity based on their assessment of risk. They can impose those restrictions ahead of any actual freeze.

guard-of-terra• 12 years ago

Not different. But they can't freeze my cash.

greenyoda2• 12 years ago

It's even worse than that. Not only can MasterCard arbitrarily refuse to accept payments for a business, it can cancel any consumer's account with little recourse. Let's say that someone steals my credit card number and uses it in a foreign country, and MasterCard detects this fraudulent use of my card and shuts down my account. At that point, if I can't buy food and other essentials with cash, I'd be in real trouble. Also, it's hard to get a credit or debit card if you're unemployed - if you have no income and/or no credit history, credit card companies and banks don't really want to do business with you. And if you're homeless and begging for money on the street, nobody is going to lend you their credit card.

rweir2• 12 years ago

all of your consumer-side complaints are about banks not MasterCard.

tormeh4• 12 years ago

Of course you'd have to get a debit card - just with zero credit.

superuser2• 12 years ago

Wikileaks was engaged in a violation of that democratic country's democratically created laws against the distribution of classified information.

The rule of law goes both ways.

RichardFord• 12 years ago

According to Banga, in addition to being bad for MasterCard, cash is bad for countries and governments.

Yeah, if you're of the mindset that everything that anybody purchases should be tracked and scrutinized.

refurb• 12 years ago

One great reason why you wouldn't want to get rid of cash is anonymity. There is no better way to give companies and gov'ts the middle finger when it comes to tracking purchases than to use cash.

kimdouglasmason• 12 years ago

I wish they would just be more honest and state that killing cash would give them: 1. A payment processing oligoply that would persist forever because of regulatory capture and regulatory barriers to entry. 2. A privileged insider position when dealing with government, as all government control of payments would be implemented by them. Imagine the current revolving door between the fed, sec, treasury, and banks, but much worse. Think of all the political enemies that could be rendered financially dead. 3. The power to implement negative nominal interest rates in deflationary scenarios, which is the dream scenario of large banks and central banks everywhere, allowing them to steal from savers in ALL economic circumstances.

It's a fascist (I.e. corporate state) control freak's dream.

The Japanese have been smart enough to stick with cash in their decades of deflation. As it looks increasingly like a number of Western economies may 'turn Japanese', I hope those nations will follow Japan and stick with cash.

... and 1.5% of GDP (almost certainly overstated by an order of magnitude) is a low price to pay to prevent a demonstrably criminal and corrupt banking cartel from controlling all transactions.

bediger40004• 12 years ago

In the USA, it's cheaper to process paper checks than it is to do credit and debit card processing. Why? Because the US government does check processing.

The USA, as a society, made a huge mistake in letting private interests make electronic money. The oligopoly issue is huge, as is the cost per transaction, and the security issues of such a patched together Rube Goldberg system.

icebraining2• 12 years ago

Why? Because the US government does check processing.

That does not follow. In my country, our main payment system is handled by private banks and it's also cheaper than MasterCard/Visa (only 0.9%, with a maximum of 1.5€).

Spooky233• 12 years ago

The government doesn't run the ACH system, the Federal Reserve does.

DCKing5• 12 years ago

MasterCard's duopoly (with Visa) of all electronic payment systems in the world is so well-known it is often used as the first example of such a market in economics courses. "Legacy" payment systems such as cheques and cash are being slowly replaced by systems very much controlled by MasterCard or Visa.

This is troublesome for two reasons.

The first is political; both companies are American. This gives the American government way too much control over such critical infrastructure. Even if they do not overtly mess with the system, they most certainly are passing all this information on to their intelligence agencies. Even a single worthy competitor from somewhere else would be a huge improvement.

The second is that it stifles innovation. Because of the lack of a well-established competition, the only innovation these companies are interested in is new products that make use of their existing infrastructure. Contactless payments on mobile phones could have been reality five years ago, but MC and Visa have to jump through several hoops and require special SIMs to have it all run over the infrastructure they sell instead of the internet. And the banks are happy to wait instead of innovating themselves.

I'm all for killing cash by digital means. But not if these two companies are doing it.

zanny2• 12 years ago

Bitcoin called, its having beers with Dell atm and invited you over.

DCKing5• 12 years ago

What does the fact that I can pay with Bitcoin in a very narrow selection of web shops have to do with the vast network of debit and credit card systems that I can pay with anywhere I want (web and brick-and-mortar) without any effort whatsoever? The suggestion that cryptocurrencies are competition to MasterCard's and Visa's duopoly is ridiculous. Cryptocurrencies, due to their intrinsic online nature, are a very limited payment solution.

Note that I do support cryptocurrency efforts, use them, and follow the news with interest. But cryptocurrencies are not even close to mainstream enough to have this duopoly worried.

mfringel• 12 years ago

The MC CEO wants to instruct his people to never turn down a deal, because he wants to expand into the 85% of the market MC et al. do not have.

He's making the bet that as he grows the market, MC will be able to make the new parts profitable somehow, and that the thing holding him back is his dealmakers being too conservative.

Put another way, he's hit top safe speed, and he's just flipped up the molly-guard on the "untested go-faster button."

acd• 12 years ago

Credit card companies charges fees to the merchants selling items, in principle its a 0-2% on all purchases made with cards in the world.

s/credit card/crypto currency/g

aquadrop• 12 years ago

This may be a stupid question, but are Visa/MasterCard/etc essential? Can't banks work things out among each other?

exo7624• 12 years ago

Visa and MasterCard are basically branded, proprietary protocols. They regulate how card issuers (banks) and card acceptors (PoS and other banks) work with each other.

You can remove those proprietary protocols, replace them Bitcoin. Your card in such situation is replaced with multi-signature Bitcoin wallet and have most advantages of current system without it's greatest problems.

What stays? Third party (ex-bank) is still capable of providing you mechanisms that are there to protect your money in case of theft of your wallet. What goes away? Third party (bank) no longer has control over your money. They can't steal it or freeze it. They can't prevent you from using it.

Added value? Since you no longer need Visa INC and you can freely switch between financial services providers (ex-banks) your costs go down.

tomphoolery• 12 years ago

Cash isn't going anywhere. There is WAY too much money that's "off the books" floating around, and MasterCard is completely foolish if they think that's just going to disappear because some idiot banker tells them that cash is history.

jacob115• 12 years ago

"I don’t mean this in any bad way, considering I’m a man [myself] — but if you give the man money, he uses it for … drinking, some [form] of hedonism," he said. But, if you give the money to a woman, "the first thing it goes into is the kids: their education, hygiene in the house, clean drinking water and better food"

I thought this was meant to be about 'killing money', not Bangladesh's apparent lack of gender equality or the MasterCard boss's rather blunt views on the subject.

The article is all over the place. And -

"What really helps them realize they can make a difference is [the ability to make] a decision — and that not making a decision is a criminal offense."

If I were an employee of MasterCard, I would feel very patronized and angry in the face of a policy that disregards our opinions - even if it's obviously just a marketing farce for the stockholders.

For once, I'm glad I use Visa.

tim3332• 12 years ago

“Cash is the dirtiest secret of the modern economy. It belongs to a 200-year-old economy. It’s being allowed to play a role because it suits vested interests.”

is an odd statement. Cash goes back to at least the 30 pieces of silver in the Bible, it's not much of a secret and I wonder who the "vested interests" are. Perhaps the several billion people who use it daily? And "allowed to play a role" is odd as it's the standard system everywhere. Maybe Banga dreams of a world where Visa and Mastercard have the power to ban cash but perhaps still graciously allow it to play a role. I hope that does not happen.

Why Killing Cash is Key to MasterCard’s Competitive Strategy

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