Will U.S. Cost of Payments Ever Be Disrupted?
Technology breeds efficiency, at least under normal circumstances. U.S. card acceptance falls into the unusual circumstances category. Despite having the world’s second largest digital economy (behind China), the U.S. has the highest costs of payments (as shown in Figure 1) among developed global markets driven primarily by the high cost of cards. There is a long history behind the high cost of cards in the U.S., and a lot of atrophy towards change. However, we do not see this lasting forever. We believe that market forces will eventually disrupt the cards ecosystem that drives the high costs of payments. In fact, we can already see some of this disruption writing on the wall.
FIGURE 1: Average Credit & Debit Card Acceptance Costs in Select Regions
1Estimated market average for U.S. V/MC cost allocation
Source: Flagship Advisory Partners estimates
How Did the U.S. Get to Such Persistent High Cost of Payments?
U.S. interchange and scheme fees have increased for many years. Visa and MasterCard compete for issuing business in part, based on price. Introducing new, more expensive interchange categories, and increasing merchant acquiring scheme fees in order to fund incentives for issuers has been a winning strategy for many years. The price-taking merchant acceptance side of the ecosystem has no real means of defense; deciding not to accept Visa or Mastercard is not practical. Regulators appear to have little appetite to re-engage on further regulation of interchange following the Durbin amendment that regulated certain categories of debit card interchange more than a decade ago. Such government price setting is generally frowned upon in the U.S. and some saw the Durbin amendment as questionable public policy (i.e., simply a transfer of wealth from one powerful set of companies to another with little benefit to consumers or small businesses).
U.S. merchants are constantly on the lookout for tactics to reduce the high costs of card acceptance. Finding and supporting lower cost alternative payment methods is the easiest way offset the cost of cards. Figure 2 illustrates the landscape for U.S. payment methods illustrating relative cost and range of usability.
FIGURE 2: U.S. Payment Method Landscape