By Patti Murphy
ProScribes Inc.
It's the beginning of a new year. Time to assess the possibilities for the payments space in 2020. First up: cash discounting. Cash discounting, and its corollary, credit card surcharging, is perhaps the hottest ticket in merchant services. I found no firm figures on just how extensive the practice is, but if my conversations with ISOs and merchant level salespeople (MLSs) are any indication, cash discounting is taking off. James Shepherd, my co-host on the Merchant Sales Podcast, recently conjectured as many as 20 percent of merchants now offer discounts to customers who pay with cash rather than credit or debit cards.
Visa tried to quash the trend in 2018 by asserting that many cash discounting programs violate its rules. But the assertion rests on shaky ground, as the Durbin Amendment to the Dodd-Frank Act expressly authorizes merchants to offer discounts for cash or other preferred payment methods. And the assertion hasn't kept ISOs and MLSs from continuing to sell cash discounting.
The appeal of cash discounting to merchants is obvious: it offsets processing costs for credit and debit cards. And it does this without cutting into an ISO/MLS's residual stream.
Surcharging differs in that it applies only to credit card payments and is begrudgingly authorized by card brand rules under terms of a class-action settlement with retailers several years ago. From a merchant/processor perspective, surcharging is more complex than cash discounting.
For example, card brand rules dictate that a surcharge not exceed the cost of acceptance, which can vary by card type. Surcharging also is prohibited under the laws of six states: Colorado, Connecticut, Kansas, Maine, Massachusetts and Oklahoma. Several technology providers have developed software that simplifies the process by integrating with POS systems and processors to calculate allowable surcharges in real time, based on interchange rates and the laws of governing jurisdictions. While surcharging offers basically the same benefit to merchants as cash discounting, consumers tend to prefer discounts to paying surcharges. Plus, cash discount programs are easier to implement. I expect to see a lot more agents and ISOs offering cash discounting to their merchants and prospects this year.
In early 2019, the Federal Reserve heralded a new service, FedNow, that would support real-time payments clearing 24/7. But not immediately, and not for all payments. The system won't be operational until 2024, and even then, it will only be available to handle transactions for $25,000 or less.
The value cap could be a deal breaker for businesses, and without business customer buy-in, financial institutions would be hard-pressed to fund such an endeavor, stated David Walker, president of the consultancy Tiller Endeavors. FedNow also will be a credit push system, similar to ACH credits, which has failed to supplant business check usage despite being created more than 40 years ago as an electronic alternative to checks, which are debit-pull transactions, Walker noted. "I don't see anything here that encourages businesses to do this [from the perspective of] making payments," he told me.
Walker believes banks and businesses would be better served by promoting electronically created items, which are checks that start out as electronic files and clear through existing check image exchange networks. Since these transactions are electronic, end-to-end, they can be settled with the same speed and efficiency as electronic check alternatives, like FedNow payments. And there would be no need to build a new network from scratch.
Getting consumers to embrace a new real-time payment mechanism isn't going to be easy either. Credit and debit card payment posting and clearing occurs quickly enough in the eyes of most consumers. And if they want to transact even faster, there are options available, like PayPal's Venmo and the bank-owned Zelle payment system.
This brings me to mobile payments. While the mobile payment apps Venmo and Zelle have gained steam, these are used primarily for person-to-person payments. According to research by Q2 and Cornerstone Advisors, Zelle handled $122 billion in transactions in 2018, while Venmo was used for $64.2 billion in payments. This represents a fraction of all digital P2P payments – banks saw $172.3 billion in P2P payments through their proprietary apps in 2018, while PayPal was used for $141.8 billion.
Mobile payments by consumers to businesses are a different matter. Despite the ubiquity of smartphones – just under three in four Americans are expected to be using smartphones this year, according to the online data portal Statista – most consumers aren't using those devices to make payments. CNBC reported in August 2019, that adoption rates for mobile payment apps (think Apple Pay, Google Pay and Samsung Pay) hover below 10 percent.
I'm often asked why mobile payments have been slow to gain traction in the United States when they seem to be taking off in other, less developed countries. eMarketer.com recently published a report predicting that 36.3 percent of smartphone users would make in-store mobile payments in 2019, but noted nearly all users would be in the Asia-Pacific region, mainly China.
There are good reasons why mobile payment apps are faring better in these countries. The most obvious of these is that cash is often the only other alternative. And in some countries, like India, the government actively encourages digital payments over cash.
A retailer-led group, the Secure Payments Partnership, recently issued a report pointing a finger of blame for slow uptake at EMVCo, the security standards group owned by the major card brands. EMVCo standards for near field communication have stymied competition in mobile payments, the report authors asserted. The standards are expensive, complex and require difficult to implement technology, they argued.
I believe there's a more important factor: ingrained habits. Americans have long embraced plastic (credit and debit cards) as cash replacements, and the rewards programs attached to cards can be a big draw. Besides, pulling out a card and inserting it in a POS device (or better yet, tapping it on a device) is easier than pulling out a smartphone, unlocking it and pulling up a payments app to execute a payment. And unless and until consumers overcome entrenched preferences for using plastic cards to make payments, merchants aren't going to demand mobile payment acceptance solutions from their payment processing partners.
Patti Murphy is senior editor at The Green Sheet and self-described payments maven of the Fourth Estate. Follow her on Twitter @GS_PayMaven.
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