20 Years of Payments Coverage

Digital Transactions celebrates its 20th birthday with a review of the 10 major themes that continue to preoccupy the industry.

When publishers start a magazine, whether in print or online—or both—there’s simply no way to tell how long it will last. There are too many unpredictable factors. But the publishers can count on one thing: editorial rigor won’t guarantee success in this crazy business, but it will help make it more likely.

We like to think we’ve applied that rigor over the years, and are now blessed to celebrate the 20th anniversary of a business magazine we started because we didn’t see another one in the market that was bringing a critical eye to the reporting of a remarkable development—the steady, inexorable digitization of  payments, one of the world’s oldest industries.

Nor has that trend exhausted itself. Coins, bills, and checks continue to circulate as industry potentates work to solve issues both real and political. From the beginning, our stress has been not so much on the mechanics of this digitizing trend, but on the thinking—the strategy—behind it. We’ve also paid close attention to exogenous factors that tend to change the color of those strategies month to month and year to year, things like state and federal regulations and overarching trends in the economy.

In this mix, we like to think we haven’t lost sight of the pace of change in the technology that has emerged, and evolved, over the years. We don’t mind saying the arc of innovation in digital payments never fails to impress us. Imagine 20 years ago—for that matter, 10 years ago—processing a transaction by lightly tapping a card on a mobile phone, with no attachments and nothing but installed software to handle the details. It would have been the hobgoblin of only the keenest imaginations a generation ago.

Still, the pace of change in this business can also surprise us, so we hesitate to predict what we might find when the time comes for a 30th anniversary issue. That milestone will arrive early in 2034, should we be so fortunate. If you’d care to hazard a few predictions, we’d be only too happy to hear from you. You never know, your insight may wind up gracing our narrative in that  issue. It will arrive sooner than we—and you—may think.

But for now, in the pages that follow, you’ll find our review of 10 major trends that have emerged or maintained their significance since that 10th anniversary celebration in 2014.

ACH

The automated clearing house remains one of the stalwarts of the payments industry and for good reason: the network’s reliability and ubiquity.

Even competition from the RTP and FedNow networks, which settle transactions in real time compared as many as three days for the ACH, is not expected to harm ACH volume. If anything, the three networks are considered complementary to one another.

“Although distinct, instant payments (RTP and FedNow) and ACH payments, including same-day ACH payments, are complementary,” says Michael Herd, senior vice president of ACH network administration at Nacha, the governing body for the ACH.

“These faster payments will coexist and offer more choices, which benefits customers and the payments industry,” he continues. “Nacha is forecasting that ACH payment volume will continue to grow, especially as businesses reduce check usage and shift to traditional and same-day ACH.”

A key factor for the ACH is that the network reaches all bank and credit union accounts in the United States. With funds settling four times a day, that means ACH payments are available to clients throughout the business day. Plus, ACH payments and interbank account transfers of up to $1 million can be completed in a few hours using same-day ACH, according to Nacha.

Going forward, Nacha says it will continue to explore ways to improve the ACH, such as extended hours and international ACH eligibility to improve same-day ACH.

Debit Cards

It’s been a busy decade for debit, and one that has largely benefited the product. Indeed, in a dramatic turnaround, fully 56.2% of consumers named debit as their primary payment card in 2022, up from 40.2% only a year earlier, according to an S&P Global Market Intelligence survey that queried 1,259 consumers in 2021 and 1,691 the next year. The turnabout came at the expense of long-time favorite credit cards, which slumped from 54.6% to 39.5% in that one-year span. That, quite simply, had never happened before.

Why the big turnaround for debit? Well, Covid, for one thing. The effects of the pandemic sent consumers scurrying to squirrel away cash and keep tighter reins on spending—all while controlling debt. In this environment, debit became popular for everyday spending. But two other factors also account for the turn to debit: the rise of contactless payments and the emergence of the buy now, pay later option online and at the point of sale.

BNPL attracted consumers—especially younger ones—with the allure of easy payments they can make with cash through a debit card. Meanwhile, merchants’ rapid adoption of contactless-payment technology encouraged consumers to tap a card, a habit that boosted debit usage as readily as did that of credit cards.

At the same time, consumers have become increasingly comfortable using debit to pay bigger tickets, including hotel bills, airline fares, and car rentals. This, too, springs largely from the impact of the pandemic, but the turn to debit is expected to last as consumers show interest in using debit as they once did cash—to monitor and control spending.

How long issuers will promote debit, though, is an open question as the Federal Reserve plans to reduce a long-standing ceiling it imposes on how much issuers can earn on transactions. In October, the Fed proposed a 31% cut in the main component of debit card interchange, a move that would drive that fee down to 14.4 cents from 21 cents. The reaction from the banking lobby was, to say the least, quick and emphatically negative.

Interchange

In the 20 years Digital Transactions has been publishing, not much has really changed on the interchange front. Merchants still hate it, the card networks still refuse to change the model, and legislators and regulators still haven’t tackled the issue head on.

That’s not to say efforts to reign in merchants’ interchange costs have dried up. In early 2023, Georgia introduced legislation to ban the portion of credit and debit card transaction fees that apply to sales tax. The bill was aimed at restoring fairness to the collection of sales tax and reducing the impact of inflation on Georgia merchants.

Despite such legislation, federal regulators and Congress aren’t expected to take up the fight against interchange. “The Federal Reserve has said in the past it has no authority to regulate interchange and there is no indication the critical mass exists in Congress to tackle it,” says Eric Grover, proprietor of payments consultancy Intrepid Ventures.

Two potential forces that could prompt the card networks to revamp interchange are alternative and real-time payments. While both are cheaper for merchants to accept, they currently lack the ubiquity to force the card network’s hands when it comes to interchange, Grover says.

That could change within the next decade, argues Cliff Gray, a senior analyst for consultancy TSG. “Interchange is ultimately going to drive merchants to prefer to accept lower cost alternative payments, as well as real time payments, which cost less to accept, too,” says Gray. “How can merchants not love lower-cost alternative payment methods? I don’t see the interchange model surviving as is.”

ISOs

Predictions that the independent sales organization model would disappear were easy enough to find 10 years ago. Yet, today there are 1,341 ISOs on record serving merchants in the United States, according to the Visa Global Registry of Service Providers, updated Dec. 30.

Clearly, the ISO model has not gone away, but it hasn’t remained static, either. Indeed, ISOs adapted in three key ways: offering integrated payments; working with software developers and vendors to ensure merchants have access to secure payment processing; and courting new markets.

ISOs have not been free of external forces, either. Consolidation has been a driving force among them. Still, while the big may get bigger, there’s plenty of room for smaller ISOs and payments companies. The key to survival is adaptability. That’s what worked for ISOs in the past and what will be required in the months and years ahead.

“Flexibility in target merchants, flexibility where marketing funds are invested (if at all), and the ability to pivot when an opportunity presents itself,” Jeff Fortney, senior associate at TSG, an Omaha, Neb.-based advisory firm, told Digital Transactions last year.

The outlook is solid for ISOs as long as they can help solve payment problems for merchants. “There’s plenty of opportunity for smaller ISOs and ISVs,” says Justin Passalaqua, country director for Worldline’s North America operations. “There’s always going to be problems that need to be solved in the commerce of our world.” For ISOs, especially smaller ones, the drive to reach scale is critical. Adds Fortney: “The small ISO is primarily a sales engine. Their sole goal should be to sell.”

Mobile Payments

Ten years ago, the idea of mobile payments changed forever with the debut of Apple Pay. Though other mobile-payment services had been around—Google Wallet launched in 2011 and is now known as Google Pay—the buzz around Apple Pay generated widespread consumer interest. The advent of smart phones, along with a continued push from card brands to expand contactless-payment acceptance, helped fuel the growth of mobile payments.

While mobile payments had long since been adopted in some international markets—Japan, for example—they had yet to gain significant consumer interest in North America. Apple Pay helped change that, but only so much. The Covid pandemic, as it had done with many other aspects of consumer activity, definitively changed that.

Just before the pandemic, in November 2019, one survey found that, globally, 16% of consumers on average returned to a payment app the day after installing it. For context, by 2015, 25% of U.S. consumers had made a mobile payment—defined as at least one payment within the last 12 months—and by 2021 that proportion had ballooned to 68%, according to the 2021 Federal Reserve Diary of Consumer Payment Choice.

The EMV migration, which began in earnest in 2015, also helped as most new point-of-sale terminals included contactless-payment acceptance technology. Concurrently, POS systems were designed with contactless in mind.

“Operating systems had already been upgrading to more modern standards, especially Linux. The explosion of mobile phones completed the migration to Android and iOS, both Linux derivatives,” says Cliff Gray, senior associate at TSG, an Omaha, Neb.-based payments-advisory firm.

“Square, Clover, and other similar products, along with Android-based platforms from Ingenico and Verifone, are leading product offerings in many traditional verticals, as well as enabling full EMV acceptance in previously impractical environments,” Gray adds. “Players of sizes all have heavily invested in mobile technology, with no signs of that lessening. Developer communities have already made the decision, and it’s all mobile, all the time.

Prepaid Cards

Perhaps one of the cause-and-effect outcomes that could not have been precisely predicted was the impact widespread bank closures have had on prepaid cards and other banking products. As Digital Transactions News reported late in 2019, a recently released Federal Reserve report had found “that while banks opened some branches in the study period, 2012 to 2017, they closed many more, leading to a net loss of 6,764, or 7% of all branches.” Both urban and rural counties were affected.

Rural ATMs and payday lenders benefited from that culling, but so did prepaid cards as consumers turned to the product as an alternative to banking.

Indeed, that move prompted some banks to offer deposit insurance on prepaid card balances. In Canada, for example, “Vancouver-based Peoples Trust Co. is extending eligibility for deposit insurance from the Canadian Deposit Insurance Corp. to general-purpose reloadable prepaid cards and payroll cards issued by the financial institution,” Digital Transactions News reported in January 2021.

But last spring, the Consumer Financial Protection Bureau issued a broadside against the use of prepaid cards as a means to deliver government benefits to consumers. The CFPB’s complaint? Lack of consumer choice, poor customer service, and high fees. But the regulator’s broadside skipped over some important factors, as Ben Jackson, the Payments 3.0 columnist for Digital Transactions, noted at the time.

“The Bureau’s critique seems to ignore the cards’ cost savings for governments,” Jackson said in his April 2023 column. “Fair enough. This is the Consumer Financial Protection Bureau. But it also ignores the cost of the alternative for unbanked recipients. Paper checks would lead to check-cashing fees and costs for things like money orders, as recipients without cards would be cut off from electronic payments.”

Real-Time Payments

Fifty-two pages. 853 posts. That’s what you get when searching on the term “real-time payments” on DigitalTransactions.net. The notion of real-time payments has been around for many years, but the conversation around it ramped up when The Clearing House Payments Co. LLC debuted its Real Time Payments network in 2017, accompanied by real-time person-to-person payments from Early Warning’s Zelle earlier that year.

Through the years as the ACH system added same-day processing and the card brands added real-time capabilities for their cards—Mastercard Send and Visa Direct—interest in real-time payments again ramped up last year. That’s when the Federal Reserve’s FedNow service launched, lending credence to the idea that instantly cleared and settled payments are part of the payments establishment now.

“There have been core advances over the past five years in the U.S., including the development of the RTP Network, FedNow, and Zelle (which utilizes the RTP Network and ACH to push fast payments between peers). Outside of the [United States], other countries also utilize a variety of real-time payment rails, most of which were developed in the past 10 years,” says Sheridan Trent, director of market intelligence at TSG, a payments advisory firm, in an email message.

While Zelle is consumer-facing, much of the action in real-time payments has been on the business side. “Real-time payments are still, by and large, a [business-to-business] phenomenon used for large transactions,” Trent says. “In terms of impact, the Clearing House’s RTP Network has been around the longest, and [it] reported $74 million [in] transactions in the fourth quarter of 2023, which is substantial.”

The outlook likely is strong for B2B payments through real-time payments networks, Trent says, with potential strong growth in cross-border applications.

Regulation

While regulation tends to ebb and flow depending on the political climate, the payments industry has seen a more active regulatory climate since 2020. Leading the charge has been the Consumer Financial Protection Bureau, which has increased its oversight of buy now, pay later loans, peer-to-peer payments network scams, and late fees, among other matters.

But payment providers and networks aren’t the only ones in the payments industry coming under the scrutiny of the CFPB. Big Tech is also on the regulatory agency’s radar with a proposal that non-digital wallet providers such as Apple Inc., Pay Pal Holdings Inc., Alphabet Inc.’s Google unit, and Block Inc.’s CashApp be regulated like digital wallets provided by financial institutions.

And the CFPB isn’t the only regulatory agency turning up the heat. The Department of Justice has opened its own probe of Visa Inc.’s and Mastercard Inc.’s debit card practices. Even Congress is getting in on the act with the re-introduction of the Credit Card Competition Act, which takes aim at lowering credit card swipe fees by giving merchants a choice of network, other than Visa and Mastercard, over which to route credit card transactions.

“Regulatory enforcement has clearly been picking up,” says Doug Kantor, an executive committee member at the Merchants Payments Coalition and general counsel for the National Association of Convenience Stores.

One area where Kantor sees regulators turning their attention lies in anti-trust issues, which means large companies. “There is a growing concern in general in government about large companies,” says Kantor. “As more scrutiny comes, there will have to be changes to the way the payments industry operates.”

Surcharging

Few, if any, topics in payments are as vexed as that of surcharging—the practice by merchants of adding on to the price of a product purchased by credit card to cover the seller’s credit card acceptance costs.

States at one time forbade the practice, but now all but two states—Connecticut and Massachusetts—permit surcharging so long as the added charge does not exceed the merchant’s fee from its processor. And while surcharges can vary widely, they are capped by credit card network rules. Visa Inc., for example, last spring ratcheted its surcharge cap down from 4% to 3%.

In many cases, states have allowed surcharges but have added clauses to prevent sellers from profiting from them. For example, New Jersey in August passed a law permitting surcharges but limiting them to what the merchant pays to accept a credit card.

But late last year, Visa said it would step up its enforcement of surcharging rules, including the new 3% cap. Surcharges, Visa says, are generating some 6,000 complaints to the network annually from consumers. The network said it is increasing its merchant audits of merchants it finds out of compliance with its rules, and underscored fines it can levy against merchants that try to mask a surcharge as some other fee.

But at the same time, some acquirers have added surcharge programs to their merchant offerings, and the networks are stepping lightly to avoid hampering those services. “We are not going to take away your ability to surcharge or do cash discounting,” a Visa executive told acquirers at a conference last fall. “That is not on the table. However, what is in jeopardy is the ability to do it incorrectly.”

Security

Cybercriminals have significantly upped their game the past decade. So much so, it is difficult to name a payments platform or device that hasn’t been compromised in some way. Whether it be a mobile phone, POS terminal, a back-office system, or a consumer’s personal computer, cybercriminals have numerous ways to beat cyber defenses to steal account and personal data.

One of the most concerning developments in the payments industry in recent years is how skilled criminals have become at persuading consumers to give up their identity-validation credentials through phishing scams. Once in possession of a consumers’ or employees’ credentials, no firewall or data-encryption application will protect account and personal data.

“If a criminal can get someone’s cyber credentials, they can become that person in cyberspace and use that identity to breach systems [and accounts],” says Gideon Samid, chief technology officer for McLean, Va.-based BitMint, a digital-currency platform. Samid is also author of the “Security Notes” column, which appears each month in Digital Transactions.

Virtually impersonating accountholders or employees using their own credentials dramatically changes the cybersecurity game. “It’s now less about prevention and more about early detection when it comes to breaches,” says Samid. “Eventually, a criminal is going to use stolen credentials to gain access. That makes understanding your system, and who is accessing it, key.”

That type of awareness starts with diligently tracking the behavior of every user on the system, because the behavior of cybercriminals is significantly different from that of regular users.

“We live in a global cyber village and criminals are our neighbors,” says Samid. “The chance for someone to have their credentials stolen is enormous, which is why alertness and early detection are so important now.”