By Patti Murphy
When The Green Sheet debuted 40 years ago, it wasn't a magazine. It was a newsletter. Paul H. Green, the original owner and publisher, and the man for whom the publication is named, positioned The Green Sheet as a source of education and news for reps selling merchant services. At the time, merchant services didn't involve much more than selling credit card acceptance and leasing terminals.
The industry has come a long way in those 40 years. Credit card acceptance is just part of the merchant services business, and terminal leases are rare. So what happened in 2023? Here are some highlights.
Payments got faster this year—a lot faster with the official launch of FedNow, a real-time payment system launched by the Federal Reserve in July. Although The Clearing House's real-time payments network (known as RTP) predates FedNow by several years, the Fed's move into real-time payments was a pivotal development.
That's because every federally insured financial institution can access FedNow to move payments instantly, 24/7/365. In the past, the Fed's payments clearing and settlement mechanism was limited to about 10 hours a day, and it was shuttered for federal holidays and on weekends.
FedNow is a real game-changer, said Tede Forman, president of payment solutions at Jack Henry & Associates. "Over the next three to five years you're going to see a lot of displacement of other types of payments," he said.
Research shows consumers and small businesses are eager to have access to real-time payments. A Fed survey, for example, found three-quarters of micro-businesses and 60 percent, or more, of larger merchants expect real-time payments to help them better manage cash and working capital.
Some experts caution that instant payments will make disputes and fraud prevention more challenging to manage. "Because these payments happen almost instantly, consumers and merchants have less time to address disputes or recognize fraudulent transactions," Dr. Jack T. Baldwin, chairman and CEO of BHMI, a software solutions provider, wrote in "Managing disputes for real-time payments," published in July 24, 2023, issue of this magazine.
Interchange continues to be a hot-button issue. And not just credit card interchange. The Fed, which was given the power to set debit interchange rate caps by the Durbin Amendment to the Dodd-Frank Act, wants to slash by about 30 percent the cap put in place 12 years ago. If the Fed follows through on the plan, the cap would drop to 14.4 cents plus 0.04 percent (4 basis points) of the transaction amount, plus 1.3 cents to cover fraud prevention costs.
Under this proposed regime, interchange on a $50 debit card transaction would drop to 17.7 cents from 24.5 cents today. The cap would continue to apply to debit card issuers with assets in excess of $10 billion.
The proposed haircut received immediate blowback, including from inside the Fed. Fed Governor Michelle Bowman indicated in a public statement that she would vote against adopting the proposal.
Meanwhile Senator Dick Durbin, the Illinois Democrat behind debit caps, set his sights on credit cards. Rather than regulate credit card interchange directly, Senator Durbin is pushing legislation that would require merchants be given at least two network options for processing their credit card payments. Only one of those networks, however, could be owned by Visa or Mastercard.
The expectation is that network choice will drive down interchange. But it could prove an expensive proposition for issuers who would need to reprogram all their cards. The Credit Card Competition Act, which Sen. Durbin tried and failed to get passed in the last Congress, has bipartisan support in both houses of Congress. He tried to attach the legislation as an amendment to several must-pass bills this year, but those efforts failed.
Unlike the Durbin Amendment, which took card issuers and acquirers by surprise, opposition to the Credit Card Competition Act is strong and growing, with blowback not just from financial institutions and their partners, but smaller businesses, too.
The Small Business Payments Alliance, representing entrepreneurs, small business owners and tradespeople, is pressing lawmakers to vote against any effort to push through the legislation. While large retailers may be able to take advantage of routing choice, small businesses lack the infrastructure and capacity to take advantage of network choice, the group stated.
Meanwhile, there were rumblings this year about a Department of Justice investigation into card interchange. And the Federal Trade Commission took Mastercard to task this year for forcing ecommerce merchants to route debit card payments through Mastercard networks. Mastercard agreed to provide competing networks with the customer account information needed to process debit card payments.
North of the border interchange has been slashed for about 90 percent of small businesses (those with $200,000 or less in yearly transactions) under an agreement negotiated between the Canadian government and the card brands.
Interchange has been a flashpoint for years but has become more controversial as interchange tables become more voluminous and complex. "With today's statements you practically need a masters degree to read and decipher them," stated Allen Kopelman CEO at Nationwide Payments Systems.
One workaround that has emerged and is gaining in popularity is dual pricing. It allows merchants to offload processing costs on cardholders, and it generates better residuals for ISOs and their agents.
Dual pricing comes in several flavors—surcharging, cash discounts, non-cash adjustments—none of which have proven popular with the card brands. In April, Visa reduced from 4 percent to 3 percent the maximum surcharge for a credit card payment.
Visa is not alone. It seems these charges may get caught up in the Biden Administration's campaign against junk fees. In October, the FTC proposed a new rule to rein in junk fees that includes references to both credit card surcharging and discounts for cash.
There has been plenty of news on the regulatory front, and not just from the Fed and the FTC. The Consumer Financial Protection Bureau and the Financial Stability Oversight Council both want to rein in big tech involvement in payments. Both agencies were created by the Dodd-Frank Act. The FSOC was created to identify and propose steps regulators can take to quash threats to economic stability posed by financial services firms. Back in 2021, the CFPB ordered six large tech companies and peer-to-peer platforms that operate payment services (Amazon, Apple, Facebook, Google, PayPal and Square) to provide detailed answers to questions about their business practices.
Last month, the consumer watchdog agency proposed a supervisory plan for large nonbanks that offer services like digital wallets and payment apps. The proposed rule would establish oversight of nonbank financial companies—specifically those handling more than 5 million transactions a year—in line with financial institution oversight.
Digital wallets have become the go-to payment method for online transactions. According to the FIS Global Payments Report the use of digital wallets by U.S. consumers jumped from 14 percent in 2014 to 32 percent in 2022. FIS forecasts that by 2026, digital wallets will make up 41 percent of ecommerce and 16 percent of POS transaction dollars.
The CFPB also has been looking into the enormous growth some fintechs have charted with buy now, pay later products. In November, alone, for example, online retailers rang up over $7 billion in BNPL transactions, according to Adobe Analytics. But storm clouds are on the horizon. In a report published in March, the CFPB noted that a majority of BNPL customers tend to be financially distressed; about one in four have no credit card liquidity.
CFPB officials began work this year on a set of guidelines for overseeing BNPL, including supervisory exams and reporting requirements in line with those that apply to credit card issuers.
Acquirers and their partners, and the merchants they serve, have upped their games over the past 40 years. So, too, have fraudsters. "Balancing security with a modern customer experience is a key challenge today, and outdated methods of identity verification that rely on credit files or introduce too much friction will put businesses at a disadvantage," said Christina Luttrell, CEO for CBG Americas at IDology, an identity verification provider.
As the move to faster payments (like FedNow and same-day ACH) accelerates, experts warn that the risks of fraud and errors will also grow. A November report by AutoRek, a financial services software provider, found most U.S. firms lack the infrastructure needed to support faster payments. Another report, published by the UK's Payments System Regulator, revealed that fraudsters are already working at exploiting faster payment methods to access transaction and accountholder data.
This may be one reason for the sudden interest in pay-by-bank partnerships that leverage open banking technologies. Open banking is said to benefit both merchants and consumers.
Consumers get a secure payment method, and merchants can leverage open banking with advanced decisioning engines to initiate payments at optimal times. In October, JPMorgan Chase became the first big bank to offer pay-by-bank using open banking technologies provided by Mastercard. Chase said it will use traditional ACH rails to support payments directly from a consumer's bank account. Chase said in a press release that it has a "robust pipeline" of biller clients ready for pay-by-bank.
Mastercard is heavily invested in open banking, which allows for the sharing of a consumer's financial information between their banks and authorized third parties by way of application programming interfaces (APIs). A key benefit for billers, especially those collecting recurring payments, is that open banking eliminates the need to store and regularly update sensitive customer financial information. Looking ahead, merchants need to be ready for the PCI Data Security Standard v.4.0, which takes effect in March 2024. The updated standard is expected to provide qualifying organizations with more latitude in interpreting the guidelines.
"From time-based requirements to vulnerability management, the standard calls upon organizations to look at how they operate, what is required to operate, and how this impacts the security of cardholder data," said Adam "Sully" Perella, technical director at Schellman Compliance.
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 (www.proscribes.net)
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