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The transaction-cost savings and tender steering provided for in the big interchange settlement reached earlier this week will be worth hundreds of millions of dollars annually for major merchants and the big mobile-wallet providers, according to estimates provided to Digital Transactions News by San Carlos, Calif.-based payments researcher Crone Consulting.
The settlement, which for now has ended years-long wrangling and litigation between merchants and the major card networks over the cost of card acceptance, cuts sellers’ interchange costs and provides a route for merchants to encourage alternative payment methods. Interchange is the fee—typically a percentage of the transaction amount—that merchants pay acquirers, the entities that sign up merchants and process their card transactions.
The agreement provides for a three-year, 4-basis-point reduction in the rates set by Visa and Mastercard. That rule will yield potentially hundreds of millions of dollars annually for big merchants and mobile-wallet providers, estimates Richard Crone, principal at Crone Consulting. PayPal, he figures, could save nearly $202 million per year, or some $606 million across the three-year period of rate reductions called for by the agreement.
Other big wallet providers and merchants, too, could rack up significant savings on card acceptance, according to Crone’s calculations. Amazon’s windfall could add up to $483 million, while Apple stands to save $336 million and Wal-Mart $261 million. Crone based his estimates only on the portion of sales in one year derived from card transactions.
“It’s no skin off Visa’s and Mastercard’s backs. This is only on interchange,” Crone observes. “The ones funding this settlement are the issuers.”
A significant part of the savings, he argues, will come from so-called tender-steering, a move enabled by the settlement that will let merchants encourage consumers to use lower-cost payment methods, including in-house credit offerings and buy now, pay later plans. Indeed, the savings he calculated can be as much as tripled, he argues, if “you just move 1% of your mix from the highest-cost tender to your lowest-cost tender.” Other lower-cost options, he adds, include decoupled debit and automated clearing house transactions.
Wallet providers may have an additional revenue play, Crone argues: fees for “top-of-wallet” placement at major merchants. These players “now have a new revenue upside,” he says.
Indeed, he sees the potential in tender steering could outweigh the eventual benefits of the interchange reductions. “Their biggest concession,” Crone notes, referring to the card networks, “is allowing unfettered tender steering, which they had fought tooth and nail for years.”
The importance of the tender-steering allowance shouldn’t be lost in all the calculations stemming from the settlement, Crone argues. “The Visa and Mastercard settlement puts tender steering on steroids,” he says in a separate email to Digital Transactions News, “because it provides, for the first time, unfettered use of surcharges, discounts (carrot & stick) tactics by merchants, issuers, payfacs like PayPal, brands [and] others to motivate consumer use of lower cost, loyalty-enhancing preferred tenders.”
