You’ve probably heard a lot about two-party systems this election season — with most of that chatter being about our two-party political system’s failure to benefit everyday Americans while upholding the elite few. You’d probably even agree that ANY two-party system, given enough time, will always result in two powerful “sides” that squelch innovation, pick arbitrary winners and losers and reduce your choices. Two-party systems are good for the parties who operate them and bad for everyone else.
And this is why I want to turn your attention to a two-party system that doesn’t get enough scrutiny and one that definitely doesn’t benefit Americans: the two-party payment system.
Open your wallet, purse or payment app and take a look at your credit and debit cards. Odds are that nearly all have just one of two logos on them. That’s because there are only two major players in payments. In fact, those two card brands account for 86 percent of market share in the U.S.
The two players control the payment infrastructure and all other providers, services and systems are forced to fall in line. The biggest stakeholders for the major card brands are the issuers of the cards — banks. The first credit card company was built by a bank but later split off to avoid being a monopoly.
That means card brands exist primarily to benefit banks (and their own shareholders). That’s not great for the other parties involved in a payment — namely retailers and their customers.
Banks make money on every transaction and the card brands set non-negotiable fees that merchants must pay to the banks. This typically results in merchants paying the card brands and banks between 3 percent to 4 percent of the sales amount.
Merchants hold almost no power in this relationship and must accept whatever price increases the card brands impose. The two-party payment system has created such inequality in power that merchants resorted to a class action lawsuit against the card brands to try and force changes — with limited effect — and the Department of Justice recently opened a monopoly investigation into the largest card brand in the world.
Since banks make money on every transaction, they need as many consumers as possible to pay with their cards. This has led to a sophisticated rewards and cash-back system the banks use to incent consumer behavior. And, since merchants have almost no power in the relationship, the card brands determine that merchants must pay extra fees on these “rewards” cards.
Merchants aren’t allowed to decline more expensive cards, and they, not the banks, end up paying for the customers’ rewards.
You can see how unfair and costly this system has become for merchants, but you might not initially see how the system also hurts consumers.
Retail is a notoriously low-margin business and retailers cannot simply absorb a 3 percent to 4 percent hit on every transaction. Instead, prices for products and services are increased accordingly. The consumer doesn’t generally know it, but they end up paying 3 percent to 4 percent extra while only getting 1 percent back from their bank. Like for the merchant, the two-party payment system results in consumers coming out behind, even if they think the 1 percent cash-back benefit is a winner.
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Not only do two-party systems allow the operators to exercise control over participants already in the system, but two-party systems, given enough time, grow so powerful that they can squelch any upstart competitor and the innovation such disruptors might introduce.
It is the same in payments where we regularly see the major card brands acquire companies before their innovations can reach the masses and disrupt the existing infrastructure.
The two-party payment system is so powerful and entrenched that even the most disruptive of the supposed “disruptors” — cryptocurrency and blockchain innovators — have resigned themselves to partnering with banks and the card brands to issue standard debit cards to connect their “Web3” crypto services to traditional merchants.
It doesn’t matter how innovative your service is, you cannot disrupt the two-party payment system when you rely on their infrastructure as the critical connecting point between your service and merchants.
Can a seemingly all-powerful two-party system ever be disrupted?
Yes. I believe it can.
Here’s how I envision the solution. First, it cannot rely on the existing infrastructure. Second, it must provide sufficient benefit to the primary constituents who utilize the system (the merchants and consumers) to draw them in. Third, it has to be simple to participate in — the more friction, the more benefit has to be offered to overcome switching costs.
We live in a world where creative thinking and technology can allow this to happen. A payment network free from the limits of the existing infrastructure would be able to offer a digital-only interface that works just as well in e-commerce as it does in retail, never gets lost, never has to be replaced, can utilize secure, single-use tokens rather than static card numbers, would allow consumer engagement at the time of payment, would be low cost and could guarantee every payment to merchants.
The technology and alternative infrastructure to make this a reality already exist — but just in parts. To break up the two-party system, the parts need to be combined into one, seamless integrated payments solution that allows merchants full control over cash-back rewards, ensuring they receive the benefits they pay for while consumers benefit from lower prices and the most rewarding payment experience possible.
Don’t be surprised when, someday soon, your favorite merchant asks you to pay with something other than the plastic in your wallet.