By Jon Matonis
Forbes
Friday, October 26, 2012
http://www.forbes.com/sites/jonmatonis/2012/10/26/generic-viagra-industry-is-pro-choice-in-payments/
"Right now most affiliate programs have a mass of declines, cancels
and pendings, and it doesn’t depend much on the program IMHO, there is a
general sad picture,
fucking Visa is burning us with napalm," screams one pharmaceutical operator.
Payment
intervention is defined as the use of the payment mechanism to detect
or prevent certain transactions that are deemed to be politically
incorrect or against a particular jurisdiction's law. The latest target
is online pharmaceuticals and their affiliates providing medications
such as generic or unlicensed Viagra, Nexium, or Lipitor, all of which
are illegal for Americans to have mailed into the United States.
In the recent paper
"Priceless: The Role of Payments in Abuse-advertised Goods" presented at the
19th annual ACM Computer and Communications Security Conference in Raleigh,
North Carolina, five academic researchers outline the methodology
behind the aggressive practice known as payment intervention and
arrogantly conclude that it is in society's interest.
This is the
ugly face of monetary repression. It is shameful! Using the payments
system as a repressive tool for or against certain behavior is like
using Catholic Church attendance as a way to target illegal immigrants.
In a free society, private payments should be covered by
merchant-customer privilege just as
attorney-client privilege
covers confidential legal communication. Like the telephone network
used to execute a transaction, the payments network is a neutral actor.
Pro-choice means placing the decision of payment type in the hands of
the money owner. Grandma wants her affordable generic Lipitor.
Oddly
coupling the pharmaceutical sector with the counterfeit software sector
in a dual study, researchers acknowledge the fragility of payments and
show how an eradication effort can lead to the pursuit of riskier
alternative payment methods:
"Overall, we find that
reliable merchant banking is a scarce and critical resource that, when
targeted carefully, is highly fragile to disruption. As a testament to
this finding, we document the decimation of online credit-card financed
counterfeit software sales due to a focused eradication effort. We
further document how less carefully executed interventions, in the
pharmaceutical sector, can also have serious (although less dramatic)
impacts, including program closures, pursuit of riskier payment
mechanisms, and reduced order conversions. Finally, we document the set
of countermeasures being employed now by surviving merchants and discuss
the resulting operational requirements for using payment intervention
as an effective tool."
Herein lies the problem with the current payments network. It is far too dominated by Visa
and Mastercard whose contracts with acquiring banks stipulate that
merchants are prohibited from selling goods that are illegal in the
purchaser's destination country. Therefore, simply participating in
those payment networks inextricably links the law to a voluntary
transaction between two consenting parties providing an enforcement
mechanism that wouldn't necessarily exist under other payment types.
Access to safe and affordable pharmaceuticals should be a
natural right for all Americans and denying it would be
unacceptable, unethical, and a threat to the public health.
A strong case can be made that uninsured, low-income patients obtaining
affordable medications is a morally legitimate activity. "Does legality
establish morality?"
asks economist Walter E. Williams, who
answers, "Legality alone cannot be the talisman of moral people."
In June 2011, Visa
(and Mastercard similarly) made a series of changes to their operating
regulations and explicitly classified pharmaceutical-related merchant
category codes as "high-risk" along with gambling and various kinds of
direct marketing services. Kudos must be given to the State Bank of
Mauritius for being the only bank that both correctly codes
pharmaceutical transactions and supports a large number of affiliate
programs.
Leaving aside for the moment the twisted economics of privileged drug manufacturers
collaborating with generic manufacturers, the
immorality of the patent system, and the
case against intellectual property, supranational authority was bestowed upon the
IACC (International AntiCounterfeiting Coalition) in 2010 through a
series of agreements made between brand holders, payment providers, and the White House’s
Intellectual Property Enforcement Coordinator. The agreements
streamlined targeted actions against 'rogue' websites and merchant accounts used to monetize counterfeit goods and services.
Bragging
about the simplicity and effectiveness of the initiative, the study's
researchers reveled in determining who was 'rogue' and then preparing
them for 'termination':
"Security interventions should ultimately be evaluated on both their impact in
disrupting the adversary and their cost to the defender. On both counts,
the payment tier of abuse-advertising appears to be a ripe target. For
the few tens of dollars for a modest online purchase, our data shows
that it is possible to identify a portion of the underlying payment
infrastructure and, within weeks, cause it to be terminated."
Unfortunately,
the practice of targeting the payments mechanism is on the rise by
governments and sufficiently "chilled" payment network lackeys, but it
will backfire in spectacular fashion. Consumers will be driven to more
liberated alternatives such as the privacy-oriented and cash-like
bitcoin. They certainly don't want VISA, Mastercard, PayPal and the rest
of the gang telling them what is and is not an acceptable purchase.
Interestingly, the study cited bitcoin among creative alternatives when Visa processing becomes abruptly disabled:
"A few US-based pharmaceutical programs, notably Health
Solutions Network (which we did not study in our analysis), enabled
Cash-On-Delivery (COD) payments for their customers when their Visa
processing was disabled. Ultimately, the effectiveness of such
mechanisms depends on their familiarity and overhead to consumers, the
readiness of alternative sites offering more traditional payments, and
the extent to which consumers are well motivated. Indeed, while we
witnessed some programs (notably in the OEM software space) attempt to
continue their businesses using alternative payment mechanisms including
PayPal and, most recently, Bitcoin, by all accounts this has not been
successful."
I expect that to change radically for
Bitcoin
as the features of decentralized cryptographic money become more widely
appreciated. Used properly, bitcoin can have the privacy attributes of
paper cash and bitcoin doesn't make morality judgements about what you
choose to do with your money. It is a natural fit for the online
pharmaceutical industry. Payment providers, especially mobile payment
providers, claim to represent the best in consumer-centric solutions,
but if they truly care about consumers, why do they block so many
important transaction types that consumers want?
Somebody has to
say it. Big Pharma is a racket and Americans are being duped by the
government and the powerful drug manufacturers that push
their
overpriced medications while simultaneously hiding behind the veil of
protecting patient safety, for your own good of course. But "the little
blue pill" will be protected as Pfizer's expiration date for the Viagra patent has just been
extended until April 2020 which means no legal "generic Viagra" in the U.S. for several more years.
Perhaps
more broadly disturbing is that the five individuals authoring the
study seem to tacitly recommend the 'payments network' as the delegated
enforcement arm of the justice system and sanctioned brand holders.
These complicit payment providers do not practice payment neutrality nor
do they recognize the importance of remaining nonpolitical and
challenging encroachments that lead to politicalization.
The
reason that it has become possible to utilize the payments apparatus in
this manner is because society has become too complacent on insisting
that our money not be used for identity tracking. The general attitude
towards the privacy of cash (both physical and digital) has been eerily
nonchalant and too readily conceded. Until that changes, expect evermore
diminishing privacy in your transactions.
For further reading:
"Forbes on Viagra, Bitcoin and Intellectual Property", Stephan Kinsella, October 29, 2012
"Rogue Pharma, Fake AV Vendors Feel Credit Card Crunch", Brian Krebs, October 18, 2012
"Pharma vs India: a case of life or death for the world’s poor",
Nick Harvey, October 17, 2012"Fake pharmaceuticals: Bad medicine",
The Economist, October 13, 2012
"What Payment Intermediaries Are Doing About Online Liability And Why It Matters", Mark MacCarthy, July 5, 2010
PaymentsSource
Friday, February 22, 2013
http://www.paymentssource.com/news/visa-mastercard-antitrust-settlement-is-anticompetitive-3013321-1.html
As part of last year's $7.9 billion preliminary settlement agreement in the class action against Visa and MasterCard, the card networks enacted a rule change allowing merchants to surcharge customers up to 4%. Effective Jan. 27, 2013, the optional surcharge is permitted on credit card transactions in an effort to defuse merchant allegations that the card brands were violating the Sherman Antitrust Act by unlawfully fixing interchange fees and rules.
The interchange fee structure of a four-party payment system is predicated on William F. Baxter's seminal piece from the 1983 Journal of Law and Economics. In this study, Baxter laid out the elements and cost structures for each of the participants in a four-party payment transaction – cardholder, issuer, acquirer, and merchant. Essentially stating that cost flowed principally to the issuer despite interest rates and annual card fees, Baxter economically justified the merchant (or acquiring) fee that would flow back to issuers now known as the IRF, issuer reimbursement fee.
Nearly 40% of Visa and MasterCard merchants are located in the 10 states that ban surcharging including California, New York, Florida, Texas and Massachusetts. Despite this and the proposed surcharging bans recently introduced in more than seven other state legislatures, it is easy to understand why some might see this settlement as a triumphant leveling of the competitive playing field.
Seemingly unaware of the historical reasons for creating the no-surcharge rule in the first place, Zywicki inverts the issue. Consumers are not the winners as the fee was always embedded into pricing and unfortunately this settlement does nothing to affirm free-market principles. Mandating no surcharges for the merchant participants of their early fledgling networks allowed the card brands to make them an all-or-nothing offer to entice novice cardholders. Had surcharging been permitted from the beginning, it would have been difficult to persuade cardholders, and therefore merchants, because consumers would be incentivized to stick with cash and check payments.
It's more likely that the card brands didn't want to permit merchants to offer discounts for cash transactions. Are they preventing card surcharges or are they preventing cash discounts? Is the glass half-full or is it half-empty? Maybe a “surcharge” is more palatable for consumers now if it is described as a discount for cash.
Sometime during the 1990s, when critical mass was reached and saturation occurred in the credit card payment networks, the tables were turned. Merchants no longer had to be persuaded to accept credit cards as a form of payment. At least in the U.S. and other developed payment markets, merchants realized the benefits of catering to consumer preference for cards and they didn't want to suffer by not offering that choice. The card brands’ acceptance strategy had come full circle, but the no-surcharging rule had not caught up.
With the all-or-nothing choice of "accept all payments at the same price or no card processing at all," once the "nothing" choice started to look relatively attractive, the card payment networks would be forced to open up. That's what alternative payment types such as Bitcoin start to permit. The card-branded networks would begin to see a disadvantage in prohibiting surcharging because all alternative forms of payment, including cash, must cross-subsidize the cards. This allows a non-card-accepting merchant to maintain a significant price advantage over a card-accepting competitor.
So market forces arguably would have eventually pushed Visa and MasterCard to permit surcharges. But the settlement, induced by class action litigation, is worse than superfluous. It is an unwarranted and unjustified encroachment into the practices of a private payment company. Just think of the lost capital and lost productivity of a seven-year, multi-attorney billing festival. Who do you think pays for that? Furthermore, this bit of central planning via the judicial system will remove the competitive advantage that alternative payment-only merchants like Bitcoin Store have now by forcibly removing the cross-subsidization that other merchants would have had to follow in accepting bitcoin or alternatives. If the natural market penalty for cross-subsidization is removed, then alternative payment-only merchants must begin to accept all payment types or lose business.
In a free market, payment networks would compete under their own network rules, not the government's or regulators’ rules. Sadly, the perceived pricing power referred to in the antitrust case stems less from alleged collusion among Visa and MasterCard’s member banks than from the multitude of state-granted privileges they enjoy that disadvantage new entrants (such as extraordinary bailouts for favored institutions, the notion of too-big-to-fail, generous deposit insurance, etc.).
The National Association of Convenience Stores, one of the plaintiffs in the case, rejected the proposed settlement for not going far enough, saying that the settlement failed "to introduce competition and transparency into a clearly broken market." While the merchant lobbyist’s reasons for believing this may not adhere to free market principles, it accidentally happens to be the correct legal and economic posture in this case because the settlement is anticompetitive. The answer, however, is not to coerce transparency and break the market even further.
Free market competition occurs at the macro payment system level – not within a given branded system by forcibly tinkering with the internal fees and surcharges and then declaring a win for consumers. No one is coerced into using a Visa or MasterCard product and merchants are not coerced into accepting plastic payments.
The problem of a payments oligopoly would solve itself because new market entrants would discover ways to bypass the entrenched networks entirely.