Pressure Points

Lyft’s efforts to lower its costs may be emblematic of a broader initiative among so-called gig-economy firms to tame nettlesome factors like card-acceptance costs.

It’s every merchant’s dream to chop card-acceptance costs to the bone. Historically, some sellers, especially those with very large credit and debit card payment volumes, purportedly have negotiated better interchange rates.

Now, at least one company quickly ascending towards the top of the so-called gig economy is flexing its muscle.

The question, however, is: Does this relatively recent type of company—which just about exclusively depends on card payments—have any more sway with the card brands and issuers than more-traditional merchants? The answer is a definite maybe.

With $2.28 billion in losses over the past three years, ride-share provider Lyft Inc. is looking to cut costs—and payment-card acceptance expenses won’t be spared.

Combining Tip And Fare

In a filing last month with the Securities and Exchange Commission for an initial public offering of stock, San Francisco-based Lyft outlined several initiatives it already has started or is planning. The registration statement notes that as Lyft’s ride volume has grown, so have its payment-processing fees: up $109.6 million last year following a $140.3 million increase in 2017.

The so-called S-1 filling doesn’t say whether payment costs are rising in exact lockstep with ride volume. Payment fees are listed in a line item called “cost of revenue” that also includes insurance, where bills are rising even faster than payment fees, and hosting and platform-related technology expenses.

In all, cost of revenue totaled $1.24 billion in 2018, up 89% from $659.5 million in 2017, when costs rose 136% from 2016. Higher costs in the three categories all “were driven by significant growth in the number of rides,” the filing says.

Lyft drivers have provided more than 1 billion rides since the service launched in 2012. Most rides are paid through credit and debit cards via Lyft’s mobile app, or through third-party payment services. The IPO filing outlines several ways in which Lyft is trying to rein in payment costs.

“In 2018, we added an additional payment processor for credit and debit card transactions,” the filing says. “We expect the fees paid to this additional payment processor will be lower than our other primary provider.” The filing names neither provider, but San Francisco-based e-commerce processor Stripe Inc. counts Lyft as one of its customers.

Lyft also said it is revising its transaction workflows to avoid incremental fees. “For example, we are updating our payment processing to capture a ride fare and tip as a single transaction rather than two separate transactions with two separate processing fees,” the filing says.

That effort echoes a plea a Lyft executive made at a Chicago conference last summer in which he called on the payment card networks to revise their procedures to accommodate new gig-economy companies such as Lyft. (“Gig economy” generally refers to technology-enabled services delivered via self-employed providers, such as ride-share drivers).

“Lyft is a high-volume business with a lot of transactions. They appear to have reached the point where they can successfully lower their cost per transaction,” says e-commerce researcher Thad Peterson, a senior analyst at Boston-based Aite Group LLC, by email. “Combining the fare with the tip will also consolidate their volume and increase the efficiency of their payment operation.”

Lyft also indicated it’s ready to bargain for lower interchange, and might even introduce its own payment-related services.

“Over time we intend to lower costs of significant portions of our portfolio by negotiating private interchange rates with larger financial institutions and by possibly creating our own payment products,” the filing says. The document doesn’t offer details, and a Lyft spokesperson did not respond to a request for comment from Digital Transactions.

“As company revenue increases, so too do their payment expenses, and as they achieve scale it’s logical to explore both lower-cost alternatives as well as additional feature functionality that adds value,” says Peterson.

The Starbucks Model

What might those payment-related services look like? They may reflect those of Starbucks Corp., some observers say. Usually held up as an example of how to create and implement a mobile wallet, the coffee retailer is quite successful at managing a stored-value program.

“Payment mechanisms focused on merchant cost reduction are emerging,” says Krista Tedder, director of Javelin Strategy & Research, a Pleasanton, Calif.-based research firm.

“Starbucks provides the best example of how to create a new payment ecosystem,” Tedder says. “[The] Starbucks rewards program is based on the consumer loading funds on a physical or digital prepaid card. The funds are topped up in $25 or $50 increments, which reduces the number of low-dollar, high-frequency transactions.

“Starbucks also now has $1.6 billion in deposits as of [end-of-year] 2018,” she continues. “Using a stored-value program immediately lowers the payment cost of Starbucks. Uber has also created a new cash wallet mechanism to build a similar business model.”

Uber, another ride-share provider, launched Uber Cash in 2018. The service enables users to load funds ahead of rides, and like Starbucks, has an auto-refill option.

In Lyft’s case, it could offer a prepaid account with an integrated rewards program, says Aaron McPherson, vice president for research operations at Maynard, Mass.-based Mercator Advisory Group.

“The only way gig-economy companies could put pressure on interchange is if they had a credible threat to stop taking network-branded cards, or if they were currently cash or check-only and represented an important growth opportunity for the networks,” McPherson says. “The second option is not true, since they are mostly dependent on cards now. The first option would be possible if they could bypass the networks somehow.”

Buyer Present

One such possibility is faster payments, a broad effort among various payments entities to enable clearing and settlement of payments quicker than before.

“Faster payments is the leading option here. However, so far it is being positioned as a solution for paying drivers, not charging consumers,” McPherson says. “Zelle prohibits [consumer-to-business] payments currently, and banks are likely to do the same with same-day ACH and The Clearing House. They do not want anything cutting into their interchange.”

Zelle is the person-to-person payments service from Early Warning Services LLC, a bank-owned company. The Clearing House Payments Co. LLC, owned by many of the nation’s largest banks, offers a real-time payment service.

Another potential move, however unlikely, is the creation of a new class of interchange that reflects a buyer-present, card-not-present transaction. It may make sense in principle, McPherson says, but it’s not likely unless the networks see an opportunity to grow their share of payments.

Still, a new interchange classification isn’t necessary, argues Javelin’s Tedder. “New industry classification is not needed. However, existing interchange models need to be evaluated and lowered to improve the business model,” she says. “If interchange is not reduced in the United States, merchants will continue to collaborate with other merchants to find new ways to extend payments.”

What could that mean? “For example,” Tedder explains, “it is very easy to envision a future where Amazon Payments are accepted in stores which sell products on the Amazon marketplace. It would create a new payment model which would be focused on mobile acceptance and security while reducing processing costs. Walmart would also be able to facilitate a similar payment structure for other merchants.”

Bans That Backfire

Still another, albeit drastic, strategy to pressure the card networks on interchange is to ban card transactions. While risky because it could alienate consumers, the move gets everyone’s attention. Witness Kroger Co.’s recently imposed ban on Visa credit card acceptance at two of its regional chains. Walmart Inc., too, has practiced similar tactics.

“Kroger and Walmart have had some success with banning certain network-branded cards from some of their stores,” McPherson says.

But he points out the tactic’s drawbacks. First, they are typically limited in their effect. “”Kroger’s does not include their supermarkets, but a separate branded chain within their corporation,” says McPherson. Second, he adds, the bans can rile up customers and drive them to rival stores.

“In a highly competitive market like ridesharing, where it is simple for Lyft riders to switch to Uber, and many drivers work for both, such a [move] would likely backfire,” he says.

—With additional reporting by Jim Daly