The expected cut to debit interchange may send some payments startups, which pitched their services as low-cost alternatives, back to the drawing board.
With the cost of accepting debit cards expected to drop for merchants, players like Bling Nation Ltd., Square Inc. and others that market their services based partly on providing cheaper or more transparent pricing for retailers may no longer be as attractive.
Lower debit interchange "is going to take a lot of the air out of many of the alternative payment mechanisms that have been proposed, especially the mobile payment mechanisms," Andrew Dresner, a partner at Oliver Wyman, said at a Keefe, Bruyette & Woods Inc. conference in New York last week. "It's hard to see that a merchant having won the battle and getting 12-cent interchange on debit is going to now welcome with open arms … [a company] that wants to charge them … 1.5% of face value."
Bling Nation charges merchants a $299 sign-up fee that includes a special contactless terminal that can be used for loyalty and payment and a $39 monthly fee. For merchants that accept payments and use a new couponing service called FanConnect, the company charges 1.5% per transaction, which exceeds 12 cents for any transaction above $8.
Bling Nation says its merchants are getting more than just payment acceptance because its pricing now includes loyalty services.
Square announced Tuesday that it is eliminating 15-cent base fee it charged for card-present transactions. It still charges 2.75% of the transaction, which exceeds 12 cents for any transaction above $4.36. For card-not-present transactions, the San Francisco company charges 3.5% plus 15 cents per transaction.
Square did not respond to questions before deadline Wednesday, but it has said that its selling point is its ease of use and its ability to provide payment acceptance for very small merchants.
Some experts say the Durbin amendment to the Dodd-Frank Act, which instructed the Federal Reserve Board to set reasonable and proportional debit interchange fees, could give newcomers a boost, especially if their pricing is competitive and they are offering additional services, not just payments.
Todd Ablowitz, president of the payments consulting firm Double Diamond Group LLC in Centennial, Colo., said the regulation creates an opportunity for companies offering mobile wallet services that give consumers access to multiple bank cards and loyalty accounts — "as long as those players recognize that the amount of money per transaction is irreversibly going down."
"The economic value for these new players has to come from other solutions like coupons, Groupon-type offers, marketing and tickets," Ablowitz said.
Some mobile payment companies are already making changes, though they have not cited debit interchange as a driver.
Bling Nation, a Palo Alto, Calif., company that lets retailers accept contactless payments using stickers that consumers attach to their phones and other devices, has begun pushing a loyalty service that lets merchants use Facebook to drive traffic.
Bling Nation partners with banks to issue Bling stickers tied to consumers' existing bank accounts. Bling Nation also allows transactions to be funded through a PayPal Inc. account.
Matthew Murphy, a general manager at Bling Nation, said in an interview Wednesday that Bling Nation is paying attention to the Fed's interchange rules, which are scheduled to take effect in July, but said its transaction fees are very low compared to the costs of accepting other payment types.
"We did that on purpose," Murphy said. "We realize there's a lot of people who sit in between the transaction, which causes the per-swipe fee or per-transaction fee to go up. We made a conscious choice to go as low as possible."
"Our primary revenue stream is not transaction" fees, Murphy added.
With Bling Nation's FanConnect "social rewards program," consumers earn discounts that can automatically be posted on Facebook. Their friends can also click on the posts to use the deals at the participating merchant.
"Consumers need a real value and a real reason to change their behavior," Murphy said.
The ability to make a contactless payment is "convenient, it's more secure, it's a little bit easier, but it didn't have enough value to fully change behavior for the long term," Murphy said.
That realization, he said, led the company to roll out FanConnect.
Because the Fed's proposal applies only to debit cards, alternative payments startups may be able to profit from the pending changes, said Richard Crone, the chief executive of Crone Consulting LLC in San Carlos, Calif.
Merchants accept a portfolio of payment types, Crone said by e-mail. Payment companies like Square, which offers merchants a square-shaped payment card reader that connects to a smartphone, and eBay Inc.'s PayPal charge a set fee for acceptance of all payment types. Those companies can control their own costs by pushing the use of lower-cost payment types to "maximize their margins," he said.
"Durbin adds another cascading level for mobile payment companies that price their service on a fixed-cost basis, benefiting Square, PayPal and the numerous other mobile payment companies emulating the same model for mobile payments at the physical point of sale," Crone said.
Such benefits are predicated on the idea that mobile payment companies already have significant merchant acceptance, Ablowitz said.
"When you talk about the world of face-to-face payments, if I can get someone to use the ubiquitous debit card and that's going to cost me 12 cents plus processing fees, why on earth would I pay more for something that has fewer users when the mag stripe works just fine," Ablowitz said, adding that this argument is why it is crucial that mobile payments companies support targeted offers, rewards and other activities.
Many are watching to see what pricing the operators of a mobile payments network called Isis will offer merchants. The network is being developed by a joint venture between the wireless carriers AT&T Inc., Verizon Wireless and T-Mobile USA.
It plans to rely on mobile phones equipped with near-field communication technology that will be able to make transactions as well as participate in rewards programs. Transactions will be routed over Discover Financial Services' payment network. Barclaycard US, a subsidiary of Barclays PLC, has signed on to be an issuer for Isis.
A spokeswoman for Isis said executives with the network were not available for an interview Wednesday and are not prepared to discuss pricing at this time.
Oliver Wyman's Dresner said: "I think that any alternative network that comes to a retailer and wants acceptance is going to now have to shelter under the 12-cent banner, which means they have to get all of their revenue either from marketing and offers and advertising. Or they have to get subsidized by a credit instrument of some kind, and that just reduces the population that you can go to and increases the complexity of the business model."
