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By Rick Ferguson,

One reason that news of the death of paper checks may be premature is that paper checks are still, even with the labor and time associated with processing them, the most inexpensive payment method for retailers to accept besides cash. Unless the upcoming resolution of the "Honor All Cards" lawsuit against Visa and MasterCard results in dramatically lower interchange fees, this reality may, in fact, lead to merchants developing loyalty programs that reward customers by paying for check.

Joseph F. Keller, writing recently in the Minneapolis StarTribune, talks about one retailer with 4,000 stores that tracked the cost-- including write-offs-- of all its 2002 transactions. The retailer determined that every credit card transaction cost 52 cents, a signature-based debit transaction cost 45 cents and a PIN based debit transaction cost 29 cents. But the winner in cost was the good old fashioned paper check, which cost the retailer 21 cents per transaction—less than half the cost of a credit card transaction.

These numbers are prompting retailers to look for ways to promote alternatives to credit card transactions. One such solution involves the Automated Clearing House (ACH), a Federal Reserve-supported electronic payment network used mostly for transactions like e-checks, automated payments and direct deposit of wages. ACH is rapidly gaining popularity as an attractive network for retail payment processing. Keller even envisions a customer loyalty card that would double as a purchasing card operating on the ACH network. An ACH-based card would actually allow merchants to recognize and reward customers for using the network and bypass the credit and debit networks entirely. It’s possible that future food or C-store loyalty cards might also double as ACH-based payment cards.

It’s not surprising that merchants are looking to fight back against rising -- and some say monopolistic -- interchange fee costs levied by the credit associations. But at some point, I hope everyone takes a deep breath and asks, "What's the best solution for the customer?" If a customer has to choose between a credit card that offers airline miles, a debit card that offers points for signature-based purchases and a merchant loyalty card that offers a reward for bypassing credit and debit altogether, then she's going to be one confused customer. Should a "loyalty war" develop between credit issuers and merchants, the result is likely to be damage to customer relationships—both with banks and with retailers.

Wouldn't it make more sense for retailers to develop a solution that rewards loyalty to the retailer's brand, regardless of the payment method? Wouldn't the incremental revenue generated by such a program offset the interchange fees generated by customers who won't give up their plastic? And wouldn't such a program defuse some of the current tension between merchants and issuers and get customers out of the middle of the argument?

Just food for thought. All retailers are also customers; the next time you’re asked to choose between credit and debit at the checkout lane, ask yourself: “What’s in it for me?”
KC's View:
This is the latest in a monthly series of columns about the subject of loyalty marketing from the folks at COLLOQUY and