“Never Interfere With an Enemy While He’s in the Process of Destroying Himself”

From Reuters:
Visa, Mastercard mull increasing fees for processing transactions

Visa Inc and Mastercard Inc, the two biggest U.S. card networks, are preparing to raise certain fees levied on U.S. merchants for processing transactions from this April, the Wall Street Journal reported on Friday, citing people familiar with the matter.
Some of the changes relate to so-called interchange fees, the report said. Interchange fees are what merchants pay to banks when consumers use a credit or a debit card to make a purchase from their store.

So the gist of the Reuters article is that they plan to increase fees for the merchant banks for processing transactions. Now while it doesn’t sound like they’re increasing fees on the businesses who take credit cards directly, it is almost certain that the merchant banks will pass on the fees charge to them down to those businesses. Who in turn, are very likely to do 1) pass on the fees to customers by raising prices, 2) offering more ‘cash discounts’ for cash or debit transactions, 3) take a more serious look at “that crazy bitcoin idea the kids are talking about”. Possibly all three.

Now the point of my article is not to paint the credit card companies as evil or “the enemy”, but rather show how they are ultimately acting against their own self-interest and potentially pushing more merchants and businesses to accepting crypto as payment. While I do view debt and credit cards as, to paraphrase an old quote, “a dangerous servant and fearful master”, credit cards and bank lending are perfectly valid services and very useful when used properly. But to raise fees at a time when consumers’ debt loads are already high and alternatives to their very business model are beginning to emerge strikes me as being profoundly oblivious.

One could argue that mainstream crypto alternatives to credit cards don’t exist and so the credit cards can pull this off profitably, but the crypto and blockchain spaces are still moving quickly despite the slump in prices and mainstream interest. Visa and Mastercard might get to enjoy the additional profits of their higher fees for a couple years, but they would be sowing the seeds of discontent amongst businesses and consumers. Probably merchant banks too… sure the merchant banks and credit card companies have a long history together, but how long will they ignore a viable, lower-cost alternative that would realize higher profits for their company and shareholders? Those planted seeds of discontent would be ready to grow and bear fruit once mainstream-accepted crypto-based alternatives are present in the market, leading to a substantial, if not crippling, loss of market share for Visa and Mastercard. And if a US recession is truly waiting in the wings over the next year or two (which seems likely given the length of this bull run), that will create an even larger incentive for businesses to cut costs.

If they were more forward-thinking and open to change, they would be finding ways to adapt their business model to crypto-based alternatives instead of doubling down on their existing system. I suppose it’s always possible they are researching a “crypto plan B” while trying to milk everything from the existing system while they can, but I doubt that’s the case. More often than not it’s the big businesses like this that are REACTIVE as opposed to PROACTIVE and are least open to change… that’s just the nature of bureaucracy and very large systems.

Personally this kind of thing makes me hopeful in the long term. The more mistakes that these behemoth companies make, the more opportunities will present themselves for competing businesses and business models. I can’t judge exactly what amount of centralization and decentralization is ideal, but it’s obvious to see that the credit and banking sectors are way too centralized now. Let’s see some more competition emerge, not only providing customers better options but also reducing the systemic fragility in our financial systems by not having so many “Too Big To Fail” institutions out there.

Full disclosure: The author owns modest positions in several cryptocurrencies as well as a small crypto-mining operation. Also the author is not a financial advisor, and what is written is solely his opinion and nothing in the article should be taken as professional financial advice.