“Peak payment card” might be closer than we think

Last year, US merchants paid a record $161 billion in processing fees to accept nearly $11 trillion in payment cards value according to the Nilson Report, which also notes that the total value of fees was up 17% from 2021, even though purchases for goods and services tied to all card payments grew by only 12% year-over-year because credit card spending made up a larger share and credit cards cost merchants more to accept.

“Peak payment card” might be closer than we think

Credit card spending in fact grew by 19% in 2022, more than three times the growth rate for (less costly) debit cards. The management consultants Bain forecast peak card (in the US market) in 2029, although I think it might come sooner than that – writes David G.W. Birch, Author, advisor and global commentator on digital financial services.

With profit margins being squeezed, merchants have responded by surcharging for card use (payment consultancy TSG reckons that between 5-10% of the 8 million card-accepting small businesses in the US now charge fees for credit card usage), by discounting for cash or by encouraging customers to bypass cards completely and switch to alternatives such as payments direct from the customer’s bank account to the merchant’s bank account.

With big billers such as Verizon, AT&T and T-Mobile asking customers to shift monthly payments from their credit cards to bank accounts, they are leading a trend that will only grow stronger as instant payments, Open Banking and digital wallets gain traction.

It seems to me that there are two key factors that will determine the shift from cards to account-to-account (A2A) payments and these are consumer protection and customer rewards.

Consumer protection first.

It is often suggested that it is the issue of fraud and consumer protection that protects cards market share.

The argument is that consumers are well used to the protections afforded by card schemes (what we in the UK call “Section 75” protection) and the unconditional ability to charge back transactions.

If I buy an airline ticket and the airline goes under before I fly, I get back my money and it’s someone else’s problem of getting the money back from the bankrupt company.

However, in many cases consumers just don’t need those protections because they have an expectation of redress from the merchant.

Here’s what I mean. I am flying to New York soon and my ticket was purchased in the most expensive way imaginable (for the airline) using a platinum cash back corporate card.

This means that British Airways paid through the nose to the issuer so that the issuer can reward me with their points.

You can see why the airline might prefer to have the money come from my bank account, bypassing the card networks, so that they can reward me directly with their own miles rather than have me rewarded with a rival airline’s miles, Amazon vouchers (which is what I always use my issuer points for) or anything else.

If they offered me triple miles to pay from my bank account, I would do it.

If the flight gets cancelled, I expect British Airways to find me an alternative: I have status, so I don’t need a credit card company to intermediate.

On the other hand, if I am buying a cheap ticket on a carrier I have never heard of, I will use my credit card even if offered triple miles, because I do not have a well-founded expectation of redress from.

Similarly, if I go and buy some meat at my local supermarket and the meat turns out to be off, I will take it back to the supermarket and they will exchange it for a fresh pack.

I don’t need an intermediary.

If I buy a sweater from Marks & Spencer and it has a hole in it, they will exchange it for a new one without a flaw. And so on.

Hence I predict that where customers have such an expectation of redress, they will switch to A2A.

The other key factor is rewards.

The management consultants McKinsey point to the consumers’ love of card rewards as the biggest challenge to American adoption of A2A.

The arguments about rewards have been going on for a long time.

Durbin pointed towards the European Union’s 0.3% interchange limit for credit cards as evidence that lower interchange does not kill off rewards, but those rewards are substantially higher in America, where the interchange fees that fund those rewards stand at more than $800 per household and the top six issuers spend around $67 billion per annum on rewards for consumers.

There’s another aspect to that rewards issue that is worth noting. As “The Points Guy” says, someone is subsidising the habit. In the case of my British Airways co-brand, for example, it is other customers.

A 2022 Federal Reserve paper estimates that in the US, credit card rewards induce an aggregate annual redistribution of over $15 billion “from less to more educated, poorer to richer, and high to low minority areas”.

In short, well-off cardholders typically earn money with the use of reward cards while less well-off cardholders lose out.

If merchants were to move their loyal and high-spending customers away from cards, they and the customers could benefit.

But how?

An example might be through Open Banking and what we in the UK call Variable Recurring Payments (VRPs).

VRPs enables organisations to collect payments from a customer on a recurring basis, without asking for permission each time. VRPs are a great payment option when there’s a need for increased speed, transparency, and control, as they provide instant payment confirmation.

(There’s a win-win here. In a YouGov survey of Brits, more than half of the respondents said they would sign up for more subscriptions if they had one easy way to cancel them as with a VRP.)

As VRP and request-to-pay (R2P) services evolve, merchants will undoubtedly start to shift volume in their direction.

Forrester expect the number of consumers using open banking services in the UK to treble of the next five years and for payments driven by open banking to account for a tenth of all electronic payments by 2027, with growth powered by VRPs.

If merchants develop their strategies to integrate VRP/R2P into their apps, Bain’s forecast of peak card in 2029 might actually turn out to be conservative.


*This article was originally published in Forbes


The post “Peak payment card” might be closer than we think appeared first on Payments Cards & Mobile.