A Deposit By Any Other Name?
What’s the difference between card acceptance and a deposit?
In both cases, money is being delivered into a merchant’s bank account – in fact, a purist would point out that a deposit actually is the last stage of card acceptance for a merchant.
But consider instead a different kind of deposit – something that is more like the deposit of your salary into your bank account. In the U.S., this is done through our ACH system. Your employer sends a file to their bank, and a day or two later money is deposited into your account.
Your bank doesn’t charge you for accepting this deposit – in fact, they are glad to have your money come in. They pay a tiny processing fee to the ACH operator who sends the file to them. But no one pays anything like the “merchant discount fee” that a card-accepting merchant pays.
That’s a consumer example. The ACH system is also used for business-to-business payments, and a business receiving an ACH payment from a business customer gets that deposited into their account. They (the receiving business) may pay a small transaction fee to their bank for receiving the payment – but again, nothing like a “merchant discount fee”.
An acquirer providing card acceptance for a merchant, on the other hand, does charge their merchant this discount fee. So what are they doing to earn this? Quite a lot, actually.
- First, our card systems are “pull” payments systems, not “pushes” like the ACH examples above. In a “pull” system, you either have to have a real-time authorization system (which cards do), or you have to accept the risk of bounced transactions (as with checks). That costs money, and part of a merchant’s fee covers the acquirer’s share in those costs. Furthermore, the consumer’s card issuer is doing a lot of that work, and the card acquirer plays the role of a channel in directing a compensating fee from the merchant to the card issuer –that’s the mechanism we refer to as interchange. (The card acquirer plays this role because they’re the one with the relationship with the merchant – the card issuer doesn’t have a relationship with the merchant.)
- Secondly, our card networks have elaborate rules, many of which protect various consumer rights, including protecting a consumer when their card is used at a fraudulent or badly-behaving merchant. The merchant’s acquirer bears financial responsibility for some of these costs, and their pricing needs to cover that risk.
- Finally, card acceptance has always involved a fair amount of heavy lifting in terms of physical devices (terminals, etc.) and connectivity – one of the things that the acquirer needs to do is support the merchant’s physical card-accepting environment.
Although you can argue about the level of merchant discount fees, I think most people in our industry would agree that there is some real value being provided to merchants by their acquirers (and, behind them, by the card networks and card issuers), and that the merchant discount fee price is an appropriate way to capture this value.
So why am I thinking about this? Because I believe that a confluence of technical, regulatory, and business developments could result in some fundamental changes to these economics.
What might happen?
- “Push” payments may start to supplant “pull” payments. Imagine, if you will, that you are living in a country that has a bank-based consumer immediate funds transfer system. The U.K. has this with Faster Payments, and Mexico has it with SPEI . Other countries have it or are working on it – we’re thinking about it. These systems are like the ACH – they are simple, “push” payments that create a deposit into the receiver’s account. These are always “good funds” transations – there is no need for an “authorization” transaction to ensure that good funds are there. In the U.K., it’s up to the receiving bank to decide if they will charge their customer for accepting the deposit – but I bet most of them don’t.
These systems today are used primarily for P2P or B2B transfers, or for bill payments. They aren’t used – yet – for purchases at the point of sale. But they could be. Imagine using the banking app on your mobile phone to “push” money to a merchant’s cash register, rather than to another person. That would be an ACH-like deposit into the merchant’s account. Although the merchant’s bank might charge them for receiving the money, it wouldn’t be likely that it would be much: and without an interchange structure, there would be no way for that money – the fee the receiving bank is charging the merchant – to make its way back to the consumer’s bank. (In the U.K. they are starting to go in this direction – with the recently announced “Zapp” offering – it will be interesting to see what the pricing is there.)
- Secondly, some of these new payments system may not have the same consumer protections built into them that our card systems have. Although that may sound alarming, I’m merely pointing out that consumer protection doesn’t necessarily have to be embedded in payments system rules that end up transferring liability from one party to another. Not all of our payment systems have this: if today you pay a merchant by check, and that merchant fails to give you your goods or otherwise behaves badly, you may have legal recourse to the merchant – but not because of the rules of the checking system. The merchant’s bank, which received the deposit, is not at risk of having to return the deposit because of the merchant’s behavior.
In the developing world, some of the new “push” payments systems, particularly mobile wallet systems (often carrier provided) have no built-in recourse. This isn’t because they don’t care about the consumer – it’s because this is a way of drastically lowering the overall cost of the payment system, and therefore lowers barriers to its use, as well as reducing the logical need for a merchant discount fee to cover those risks.
- Finally, we all know that the physical environment at the point of sale is undergoing some major changes. As a merchant, if I am using a generic tablet and WIFI or BLE to accept payments, I may not need (and I certainly won’t want) to pay my acquirer a hefty fee for enabling physical card acceptance. Especially if the consumer is also paying with their phone…
So altogether, changes like this could result in some mostly unintended – and little considered – effects on our industry economics. None of this would be simple, or easy. Especially, expect resistance from incumbents – particularly financial institutions, who could be economic losers with these changes. But progress does tend to march on, and doesn’t always respect the past! If I were asked to handicap the odds of the three changes I listed above happening in the U.S. market over the next five years, I’d say “medium” (faster “push” payments), “low” (consumer protections outside of network rules) and “high” (merchant device “independence”). What do you think? I’d appreciate your comments.