How High Can Or Will Processing Rates Get? Oh, You’d Be Surprised…

When you swipe a credit or debit card there’s a whole ecosystem of players out there that consumes parts of the transaction. You wouldn’t know it as a consumer, but as a merchant it’s one of the first things you learn: if I sell an item for $100 I might only get $97 in my bank account. Sometimes it’s a bit more, sometimes less; it’s complicated.

But what’s not complicated is that these rates are only bound to go up. How much and how fast needs to be closely watched, but it’s not in the best interest of merchants, and it will eventually be against the best interest of the consumer. And when this happens, we expect serious legislation.

For starters the companies involved in moving your money are almost guaranteed to be public companies. They owe their shareholders a roughly 10% annual return. These would be the card issuing banks (Bank of America, Chase, etc.), the card networks (Visa, Mastercard, Discover, and American Express), and the acquiring banks (First Data, Global Payments, etc.). And what’s the easiest way to generate shareholder returns? Increase the fees. Here’s a great report by the GAO commissioned in 2009 titled, Rising Interchange Fees Have Increased Costs for Merchants, but Options for Reducing Fees Pose Challenges.

From this report we get to learn some crazy things. For starters, did you know there were only 6 interchange categories in 1991? Well, presumably that made it too easy for non-payments people to understand what was going on, so by 2009 there were 60 card categories for Visa, and 243 for MasterCard.

From the report, here’s a chart of interchange fees over a period of a decade. Very much up and to the right.

Here’s a more recent article from the WSJ though one would need to also account for the growth of spend to get a true sense of processing cost increases. The author asserts,

Merchants paid an estimated $64 billion in Visa and Mastercard credit and debit interchange fees last year, according to new data from an industry publication, the Nilson Report. That is up 12% from a year earlier and up 77% from 2012.

WSJ

So let’s assume that today’s average effective rate is 3%. This includes interchange and the even more bogus fees set by the merchant acquirers. Well, if all of these payments parties need their hands in the 10% CAGR cookie jar here’s how that 3% rate looks over the next decade. Keep in mind that this is net of inflation, so they’re in 2020 real dollars.

Basically at the current rate of growth, by 2030 no retailer anywhere is making a profit as they give away nearly 8% of their revenues to the payments ecosystem.

This is totally unsustainable, obviously, and it means that solvent merchants will pass along these rates to consumers.

Which means that, invariably, the FTC gets involved through their Consumer Protection arm, doing what Europe and Australia have done by legislating nominal limits on rates (really only legislating the large card networks and banks as the acquirers will still make up fees to get their nut, as they continue to do in both the EU and Australia).

The existing payments ecosystem is unsustainable. To increase revenues they’re going to need to provide real value eventually. We’d bet on a data-cultured company like Amazon, Google, or Apple to massively disrupt this space. We’re certainly not getting the innovation we’d expect out of the incumbents.