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Sunday, February 09, 2014

MooPig Tech Coroner :: "Credit Cards"

Who Pays for What Value Added?
mashed articles by Pat Darnell  |  Feb 9, 2014  |  Bryan TX

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In recent news we are seeing lots of articles about the changing situations in the Credit Card Processing industry ...
" ... But the credit card processing industry isn't going to change over night. These startups are entering into an extremely complex and entrenched space. (JOHN HEGGESTUEN. FEB. 6, 2014. LINK) ..."
In the USA alone, last year, according to Business Insider, BI guesstimate there was $4 trillion in Credit Card Processing's. We try today to answer who pays for the advertised 'value added' inducements from Credit Card Processing companies.

VISA and MasterCard don't pay directly for any value the consumer gets from using his Credit Cards. " ... They simply provide the rails that the [steam locomotive] credit card system runs on. Credit card processors like First Data that actually do the work of processing merchants' credit card transactions on the back-end are also in a strong position (ibid. Feb 6, 2014.) ..."

Credit Card Processing is a multi-faceted chain of events with a different player at each chain link. In BI referenced article there is a complete breakdown of all the links and players in the chain of events. BI also says that First Data Corp is in position to continue despite new players entering the arena. [Sorry about all the sports and train analogies.]

In November last year, Wall Street Journal, WSJ, reports that First Data Corp is going through CEO's and carrying billions in debt.
" ... First Data has run through five CEOs in about as many years. The latest is Frank Bisignano, former co-chief operating officer of J.P. Morgan Chase. Mr. Bisignano has been in charge since, oh, April 28. He'll make $1.5 million a year in salary, millions more in guaranteed incentive payments, and stands to receive at least $9.5 million in severance if he's fired (AL LEWIS. Nov. 30, 2013. LINK) ..."
In finance terms of endearment: "... First Data Corp. is drowning in about $23 billion in debt, paying credit-card-type interest as high as 11.75% at a time when the yield on a 10-year Treasury note is 2.7% (ibid. Nov 30, 2013)..." It means they are paying out 9.05% more on their end of Credit Card Processing. How long that lasts depends on the Federal Reserve actions.
"... Then came Kohlberg Kravis Roberts, the storied private-equity firm. It bought First Data for $29 billion in late 2007 and loaded it up with debt. Now First Data posts enormous losses each year (ibid. Nov 30, 2013)..."
What values to using Credit Cards is added to your transactions, you might ask? Convenience of not having to carry lots of cash around, management of expenditures for business logging, and sometimes they offer points for future expenditures, are some of the inducements that are advertised. The rationale is that if you pay the total amount of your balance each month on time, and start each month with a balance of zero, there will be no interest added by the Credit Cards.

So why all the wise ass discussion about this mega business? It is because the USA runs on this transaction method in earnest. The Credit Card Processor, First Data Corp, was profitable until the buyout and now it is leaking billions in debt. We try to understand this weird nature of mega industry, with its propensity to load up a profitable business with debt, but alas we are not in the Board Rooms behind closed doors where Directors cook up these zany policies.

We try to find who pays for the Credit Card inducements, and find a chain of players in the Credit Card Processing industry. And it is a very large industry in the USA alone. We have only scratched the shell of the egg that has a debt-full-yolk in a dubious financial market.

It will be interesting however to see what inducements new players bring to the Credit Card Processing industry to attract users. As is usual, we think in the final analysis, the consumer pays for the value added to Credit Card use.


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