By Patti Murphy
When it comes to paying for goods and services, choice is the name of the game. Consumers want to be able to choose which of many payment options they use: cards, cash, mobile and digital wallets, their bank accounts, or perhaps with a payment plan. They also want to choose how they use those payment methods, for example, whether it's a plastic card, a card in a digital wallet, a card on file, or tapping their mobile devices or cards to a POS device.
Businesses want choices, too. Typically, they want to be able to accept payments however their customers choose to pay. But perhaps more importantly businesses want to pay as little as possible for accepting payments. And therein lies the most contentious issue in the payments space.
As it has been for the past many years, the topic of interchange was in the news a lot this year. Senator Richard Durbin, the Illinois Democrat who authored the "Durbin Amendment," which caps the interchange the card brands (and card-issuing banks) can charge for debit card payments, continued his push for "Durbin 2.0."
That legislation, the Credit Card Competition Act, would upend the way card payments get cleared. It proposes that financial institutions with at least $100 million in assets (all the major card issuers) enable the credit cards they issue to be processed over at least two non-affiliated networks, only one of which can be owned by Visa or Mastercard.
Meanwhile, the states are starting to get into the interchange battle. A law set to take effect in Illinois next year would prohibit interchange assessments on tax amounts and gratuities. The pending law, the Interchange Fee Prohibition Act, is being challenged in court by an assortment of trade groups – those representing banks and electronic payment services providers, and even an airline association.
The challenge has the backing of at least one federal regulator: the Office of the Comptroller of the Currency, which has filed an amicus brief in the case. But this is not going to be the last word on the matter. Other states, including Florida and Pennsylvania are considering similar laws.
As for Senator Durbin, with the Republicans soon controlling both houses of Congress, conventional wisdom would have it that any additional legislation involving card interchange is dead in the water.
But it may not be. In a November hearing before the Senate Judiciary Committee, which Sen. Durbin chairs until the changing of the guard, lawmakers from both sides of the aisle piled on Visa and Mastercard asserting that something needs to be done to resolve the ongoing dispute with businesses over interchange.
"Visa and Mastercard and the retailers need to sit down and work this out," insisted Senator John Kennedy, R-La. "Because if you don't, Congress is going to do something."
The battle over interchange has been going on for decades, with retailers filing numerous lawsuits alleging they are being overcharged, among other anti-trust grievances. The latest of these seemed about to be settled, with the card companies agreeing to lower the fees by $30 billion over five years, but the plan was scuttled by a federal district court judge. The parties were ordered back to the negotiating table, lest the matter be settled by the court.
Surcharging, cash discounting and dual pricing are all the different ways ISOs and their merchant sales partners are conjuring to move the sales conversation away from cost. That's because instead of merchants, under these schemes consumers cover the cost of processing.
The Durbin Amendment opened the door to these forms of differential pricing, which made it clear that merchants are entitled to steer consumers to less expensive payment methods, such as cash instead of cards. Several years later, the Supreme Court ruled that card brand bans on surcharging violated merchants' free speech rights.
While there have been state laws banning surcharging, most of those have been dropped. Only two states currently prohibit surcharging: Connecticut and Massachusetts. The only caveat in the other 48 states is that surcharges are not permitted on debit cards, although signature debit cards are often treated as though they are credit cards.
There are some rules around surcharging. For example, Visa rules limit surcharges to 3 percent. Even with the Visa cap, most agents say that surcharging leads to higher residuals – some say they are earning 160 basis points (1.6 percent), or more, per transaction.
For its part, Visa has deployed an army of "secret shoppers" to identify merchants with differential pricing schemes that do not comport with its rules (such as displaying cash and card prices side-by-side).
An Arizona ISO, MiCamp Solutions, discovered this the hard way. It was fined by Visa to the tune of $70,000 earlier this year for a merchant client that didn't properly follow the rules.
Debit interchange was also in the news this year. The Department of Justice filed a lawsuit alleging that Visa monopolizes the debit card business in violation of federal antitrust laws. The lawsuit also contains allegations that Visa has entered into agreements hindering the expansion of competing networks into the field, and that it also has blocked technology companies from entering the market.
The Federal Reserve, which has authority under the Durbin Amendment to set debit card interchange, late last year proposed lowering the cap substantially, and this year found itself sifting through a barrage of comments opposing the move, and legislative proposals that it hit the pause button.
The Fed also took a hit from the U.S. Supreme Court, which ruled in favor of a North Dakota merchant challenge to the debit card cap. The merchant that sued wasn't even open for business when the cap was instituted, leading lower courts to dismiss the case. But in July the High Court took issue with those rulings and let the case go ahead.
The debate over debit interchange takes on added importance in view of the fact that debit cards more than ever are a go-to for consumers. An analysis by Wallet Hub, for example, found that among Americans between the ages of 25 and 54, debit cards are preferred over credit cards, 35 percent compared to 33 percent.
A report this year from J.D. Power, meanwhile, revealed that debit cards increasingly are being used in digital wallets, and once added are the most used payment option. Also, among consumers polled, 78 percent use their debit cards at the POS through various methods – for example, plastic cards as well as digital/mobile wallets.
The shift toward digital wallets, the firm noted, has much to do with the enhanced security features the wallets offer, such as facial recognition and thumbprint ID technology.
Speaking of digital wallets, anyone who has been watching television this holiday season is aware that PayPal is making a full-court press to be a payment method of choice at brick-and-mortar establishments.
While PayPal has long held a dominant position in online purchases, and peer-to-peer payments via Venmo, it has never made much of an impression for in-person transactions. The company is out to change that, with features like an enhanced rewards program and the ability to load PayPal debit cards onto Apple Wallets to allow for tap-to-pay.
Mobile wallets have been gaining popularity steadily, with the big-name brands gaining most; merchant-branded apps seem to lag. The advisory firm Auriemma Group reported that better than half (54 percent) of credit cardholders eligible for mobile payment apps had used the services as of April 2024.
Buy now, pay later plans have been taking off, especially among what the Federal Reserve Bank of New York has referred to as "financially fragile" Americans. Surprisingly, income isn't the primary factor driving BNPL; among reasons cited are deferred interest and convenience.
A study by the New York Fed found the biggest obstacle to growth for BNPL is first-time use. The study also found that higher-income consumers use this payment method for purchasing higher-value items.
The notion of foregoing card accounts and paying through a bank account – known as pay-by-bank – also is gaining traction with consumers, merchants and even banks. According to the FIS Global Payments Report 2024, merchants "crave" the lower cost of acceptance – typically a flat rate of around 25 cents to $1. There's a problem, however: these schemes lack chargeback structures and rewards systems that are popular with card schemes.
Walmart has been trying to move the needle on pay-by-bank acceptance. It entered an agreement this year with Fiserv that allows online shoppers to make real-time payments directly from their bank accounts. And Fiserv is said to be working with several other large merchants to support pay-by-bank. Driving these initiatives is Fiserv's NOW network, which links to real-time payment systems, like the Federal Reserve's FedNow network and RTP, operated by The Clearing House.
In addition to large retailers, pay-by-bank, also known as account-to-account payments, has been gaining with cannabis dispensaries. One dispensary network, CanPay, is using the ACH to clear payments. Mastercard and JPMorgan Chase have been piloting a similar ACH initiative with mainstream merchants.
A report published earlier this year by Visa found that "almost everyone" has paid a business from their bank account at some point, typically using traditional bill payment services. But Visa reported that about a quarter of consumers surveyed would prefer to pay from their bank accounts when shopping online.
Patti Murphy, self-described payments maven of the fourth estate, is senior editor at the Green Sheet. She also co-hosts the Merchant Sales Podcast, and is president of ProScribes Ink.
The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.
Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.
Prev Next
