The anticipated Federal Reserve Board cap on debit card 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, such players as Bling Nation Ltd., Square Inc. and others that market their services based partly on providing cheaper or more transparent pricing for retailers no longer may be as attractive.
Merchant acquirers pay card issuers interchange and pass the cost on to their merchant customers as part of the discount rate, which also covers expenses related to processing, risk-assessment and other services the merchant might want. The Fed contends debit card issuers have used interchange as a profit-generator and has proposed capping the debit card rate at 12 cents per transaction.
Currently, for a typical $40 PIN-debit Interlink purchase, the interchange fee for retail merchants now ranges from 30 cents to 45 cents, depending on volume, while the interchange on a $40 Visa check card signature-debit transaction ranges from 38 cents and 57 cents, according to PaymentsSource calculations using Visa Inc.’s published rates. Visa controls about 80% of the signature-debit market, the more profitable of the two types of debit card transactions.
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 they can use 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% of the sale, which exceeds 12 cents for any transaction above $8.
Bling Nation says its pricing now includes loyalty services, so its merchants are getting more than just payment acceptance.
Square announced Tuesday that it is eliminating the 15-cent base fee it charged for card-present transactions. It still charges 2.75% of the sale, 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 for comment, but it has said in the past 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 Fed 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.
The regulation creates an opportunity for companies that are offering mobile-wallet services that give consumers access to multiple bankcards and loyalty accounts “as long as those players recognize that the amount of money per transaction is irreversibly going down,” says Todd Ablowitz, president of payments consultancy Double Diamond Group LLC of Centennial, Colo.
“The economic value for these new players has to come from other [offerings] like coupons, Groupon-type offers, marketing and tickets,” Ablowitz says.
Some mobile-payment companies already are making changes, though they have not cited debit interchange as a driver.
Bling Nation, a Palo Alto, Calif.-based company that enables retailers to accept contactless payments using stickers consumers attach to their phones and other devices, has begun pushing a new loyalty service in the last several months that enables merchants to use Facebook to drive traffic.
Bling Nation started by partnering with banks in local communities that would issue Bling stickers tied to consumers’ existing bank accounts. It also allows transactions to be funded through a PayPal Inc. account.
Bling Nation is paying attention to the Fed’s interchange rules, which are scheduled to take effect in July. But its transaction fees are very low compared with the costs of accepting other payment types, Murphy says.
“We did that on purpose,” he says. “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 adds.
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 also use the deals at the participating merchant.
“What we realized in rolling out the mobile payment solution with PayPal and the local community banks … is that consumers need a real value and a real reason to change their behavior,” Matthew Murphy, the general manager of Bling Nation, said in an interview on Wednesday.
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 led the company to release FanConnect, Murphy says.
Because the Fed’s proposal applies only to debit cards, alternative payments startups, particularly those involved in processing and acquiring, may be able to profit from the pending changes, said Richard Crone, the chief executive of payments consulting firm Crone Consulting LLC in San Carlos, Calif.
Merchants accept a portfolio of payment types, Crone said in an e-mail. Payment companies such as 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 says.
“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 says, 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 Isis offer merchants. The network is being developed by a joint venture between 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 can support both transactions and 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 spokesperson for Isis says executives with the network were not available for an interview Wednesday and are not prepared to discuss pricing.
“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,” Oliver Wyman’s Dresner said.
