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The fight over interchange—and the future of payments—is moving to a new arena – the point of sale.
Proposed rules on debit card interchange could become a sideshow to the main event that seems to be gearing up at cash registers and in remote payments.
Two trends seem to be shifting the market. The first is merchants trying to influence payment choices with discounts and fees. The second is technology that encourages direct payments from bank accounts.
Since the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, merchants have been able to offer cash discounts to shoppers. Cash discounts have been used by gas stations since the early 1980s, and by 1989 just over a third of gas stations in the United States offered discounts to cash customers, according to a 1991 paper from Purdue University. That paper recorded a subsequent decline, but a 2022 survey by NACS, a convenience-store trade group, found that 29% of c-stores offered cash discounts on gas.
Gas stations are not alone. Restaurants, retailers, and even gyms and nonprofits are pushing customers towards cheaper payments.
The flip side of discounts is fees. Merchants have been allowed to add a surcharge to credit card transactions since 2013, according to a Visa FAQ on surcharging. An additional Q&A document from Visa says that only four states—Connecticut, Maine, Massachusetts, and Oklahoma—prohibit surcharging. Surcharging is not allowed on debit transactions. About 23% of merchants were surcharging as of 2022, according to a report by The Strawhecker Group.
The interest in surcharging has no doubt grown as cash use has declined. We can probably blame Covid for this, too, as card transactions increased during and after the pandemic.
The second trend, related to the first, is that merchants are encouraging people to pay directly from their bank accounts. For example, in December the YMCA of Greater Cleveland, Ohio, sent a letter to its members stating that, as of Feb. 1, “if you are paying for your membership or program by credit or debit card, you will begin to see an infrastructure fee of three percent added to your monthly transaction … Those who pay by electronic funds transfer (EFT) directly from your bank account or with cash will not incur this fee.”
When I contacted them, the Cleveland YMCA told me they were not alone in adopting this strategy. In fact, so many other YMCAs using the same payments platform were planning to add a similar fee that Cleveland had to delay the start of its infrastructure fee. The platform provider, Daxko LLC, did not respond to a request for comment.
Payments processor Fiserv Inc. has been marketing its pay-by-bank service as a way to disintermediate card payments. It says it uses the recently launched FedNow real-time payment service to facilitate transactions.
The push toward cash for in-person payments, along with direct payments from bank accounts, creates a challenge for payments companies: the push aims to displace all cards. Debit cards may be less expensive than credit cards, but they are still a target.
While consumers are creatures of habit, habits can change with discounts and rewards. Payments companies will need to take a holistic look at their businesses to adapt to the changing payments climate.
Banks may find opportunities to offer pay-by-bank services. Card companies may find ways to provide closed-loop or semi-closed-loop cards on restricted authorization networks. Card-fee reimbursements could become the next big credit card perk. Regardless, every link of the value chain needs to be on the lookout for new opportunities.
—Ben Jackson bjackson@ipa.org
