Start with differential pricing, often in the form of a “surcharge” on card usage or a “discount” for using cash. The idea is intuitive enough: why not make users of expensive cards pay for them? Surcharges are popular in Australia. When restrictions on surcharges were lifted in Canada in 2020, a survey of 4,000 businesses by the Canadian Federation of Independent Business found that nearly 20% were considering introducing them. They exist in parts of America.
Many have tried regulation instead. In 2015 Europe capped interchange fees for credit cards at 0.3%, several times less than most American ones. Australia introduced caps for credit cards at 0.8% and for debit cards at 0.2%. It also encouraged surcharges across a wide swathe of merchants so that shops would not have to worry about losing business to competitors if they imposed them. America’s Congress passed the Durbin amendment in 2011, capping debit-card fees at $0.21 plus 0.05% of transaction values for cards issued by large banks. Yet the amendment had unintended consequences. Because debit-card fees fell, rewards associated with them did so as well. Consumers migrated to credit cards, which do not have fee caps. America now props up the global profits of the card networks and issuers. Insiders reckon that half of Visa’s and Mastercard’s revenues come from America.
American regulators are unlikely to go the European way. Instead they want more competition. Some hope the Federal Reserve’s FedNow, which will facilitate instant account-to-account transfers when launched in July, will be a game-changer like India’s upi or Brazil’s Pix. Similar hopes exist for other fast systems like Real-Time Payments, launched in 2017, and the existing card networks’ new systems. Mr Siddiqui is optimistic about business-to-business payments. Systems like FedNow are a big improvement on today’s wire transfers, which cost $25-35 as they must be manually checked. Automated clearing-house transfers are cheaper, but they are slow and do not tell senders whether the money has gone through. Businesses are more open to new payment methods and to case-by-case pricing than consumers, so they may switch.
Consumer payments are less assured. Although person-to-person bank transfers have taken off in Britain and Europe, they have struggled to make headway with retailers, where the real money is.
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Hence a third strategy, to build an alternative payment method for existing repeat customers, rather like the RedCard of Target, a big retailer. RedCard offers customers 5% discounts on Target purchases, encouraging them to spend at Target over its competitors. Some 20% of the firm’s $100bn annual revenues come through RedCard. The interesting aspect, says Mr Rampell of a16z, is that for its debit cards, Target takes the money direct from a customer’s bank account, sidestepping normal card fees altogether.
The potential gains are large. Target would save around $2bn a year if all its customers used RedCard rather than their normal credit cards. Other companies might follow suit.
From The old bank/card model is still entrenched in the rich world:
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Reed Luhtanen, Executive Director of the U.S. Faster Payments Council (FPC) wrote about their 2023 Spring Member Meeting and the interest of merchants such as Kroger and Walmart, who talked about how they are considering using faster payments and what else needs to happen to make desired use cases come to life. He noted that merchants see faster payments are important, as they want to provide customers with the options to pay the way they want, but they are also interested in them for improving other processes beyond POS, such as business-to-business payments and instant refund of customers. According to Matt Howarter, Senior Director Payments Services at Walmart, “Not having immediate refund capabilities for consumers is unacceptable. Over 45 percent of calls to our call center are ‘Where is my refund?’ Faster payments present the perfect opportunity to be able to leverage the technology to improve that customer experience.”
The FIS Global Payments Report 2023 has some findings that confirmed some of suspicions about the direction of travel in the U.S. These included the shift towards digital wallets (which became the single leading payment method among U.S. consumers shopping online in 2022, with 32% of ecommerce transaction value) and the growth of A2A (where the U.S. follows the global trend).
A2A accounts for 9% of ecommerce transaction value in 2022. This is projected to grow to 11% by 2026, fueled in part by consumer use cases rising from the 2023 launch of FedNow, the new real-time payments network, which will join existing U.S. real-time payment networks RTP from The Clearing House and Zelle.
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The second big change is that emerging markets have developed open payments systems. They provide an alternative to both the bank/card model in the rich world and the closed fintech giants of China. Indeed, it is possible that through instant bank account-to-account transfer systems in Europe, and the roll-out of the Federal Reserve’s FedNow instant-payments service in America, the rich world may come to copy the best systems from the emerging world.
From As payments systems go digital, they are changing global finance:
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There are many European alternative payment methods (APMs) that are built on A2A rails. Most of these schemes are owned by bank coalitions, but not all (Trustly and Sofort/Klarna being notable private examples). Some of these schemes date back to the relatively early days of e-commerce (c. 2005) and were founded to displace offline bank transfers (e.g., paper Giro payments). Other similar schemes were founded more recently (c. 2015), spurred by the development of mobile apps and mobile commerce. Many of these schemes are thriving, but not all. Some have failed, notably PayM in the UK and Paylib in France. Other schemes such as GiroPay/PayDirekt in Germany and Bancomat Pay in Italy, struggle to find traction and scale. Each of these schemes had the backing of major banks (a catalyst for success) but failed to achieve uptake by consumers who are otherwise well-served by cards, PayPal, or invoicing/BNPL within those respective markets.
While the UK leads the region in digital wallet share, it is behind in A2A adoption. A2A accounts for only 9% of the U.K. total e-commerce spend ($319billion in 2022) but is around two-thirds total transaction value in Poland and the Netherlands.
The news that one of Australia’s biggest retailers, Woolworths, will start nudging customers away from cards and towards the country’s instant payment network is really rather interesting, given that Woolworths is the largest processor of payments outside the big four banks and handled A$60 billion in payments across more than a billion transactions last year. The retailer says that the shift will reduce fraud while driving customers to its digital wallet and, importantly, their rewards program. They will also benefit by receiving funds instantly, rather than waiting for next-day settlement when payments are processed via card schemes and
Snippings 