Payment Wars: The Merchant-Bank Struggle for Control of Payment Systems

Abstract:     
In recent years, the cost to merchants of accepting credit cards has risen without any corresponding new benefits. This trend has sparked a wide-ranging struggle between merchants and banks, as merchants have begun to seek greater control over payment systems. The conflict is playing itself out in business practices, banking regulation, IPOs, corporate governance, corporate restructuring, bank mergers, and the largest private antitrust litigation in U.S. history.

This article reviews the factors behind the struggle between merchants and banks and the strategies adopted by each, and uses the framework of the merchant-bank struggle to reevaluate the relationship between banking and commerce. The article argues that the extraordinary transactional and litigation energy being spent in this fight is likely for naught. Ultimately, the growth of national bank brands, technological developments, and innovative business models will independently result in a radical reshaping of the payments world that could ease merchant-bank tensions.

Keywords: credit card, debit card, payment systems, antitrust, MasterCard, Visa, IPO, PayPal, merchant, bank, network, no-surcharge rule, honor all cards, Wal-Mart, Industrial Loan Corporations, ILC, PLCC, Private Label, Co-Brand

JEL Classifications: E44, G20, G21, G34, K21, K22, K23, L1, L4

Working Paper Series