Retailer dismay over increasing transaction costs and several new emerging technologies could soon disrupt the dominance of credit cards as a payment mode, say e-commerce specialists.
A report titled: Disruption of the Payment World discusses changing electronic payment practices
“A storm is brewing, and we know it’s coming; however, we simply don’t know exactly where it will touch down and what devastation it will leave in its path,” says the report from Boston-based financial research firm Celent.
“The current euphoric era for many [credit card] issuers will be disrupted and quite possibly eliminated over the next three years,” it notes.
A lead researcher for a Canadian analyst firm also says North American market conditions indicate that issuers are coming under increasing pressure to reform.
It’s coming “not just from small merchants but also large retail chains,” according to Tim Hickernell, lead research analyst on e-commerce for Info-Tech Research Inc. an analyst firm in London, Ont.
“Something has to be done about the huge credit card service fees that stores are forced to carry,” the analyst said.
He said merchants are forced to absorb credit card transaction fees that amount to as much as two to three per cent per transaction.
“For a small business, the figure can easily add up. The more sales they make the more they pay.”
The Celent report identified two key drivers that could precipitate change:
Pressure on interchange
The first is pressure to reduce or do away with retailer “interchange rates” or service charges that continue to mount.
According to industry surveys, merchants paid no less than $56 billion in interchange fees in 2006.
Retailers are forced to absorb these charges because large credit card companies such as MasterCard and Visa have a lock on the market, the Celent report notes.
It says retailers have nowhere to go because consumers demand the convenience that credit cards offer. If the stores want their business, they should be able to process credit card payments.
However, Celent expects interchange rates will begin to decline as merchants gather more evidence against issuing firms and mount lawsuits.
The report said reward programs offered by credit card carriers to loyal users could be the first casualty, as the pressure forces carriers to re-evaluate these costly perks.
Currently, interchange charges appear to be used to fund reward programs, the report said.
Alternative payment methods
Alternative payment options will also erode the dominance of credit cards, the report said.
Celent foresees large credit companies launching alternative payment networks rivaling those of Visa and MasterCard.
Credit-only or credit-centric issuers are expected to diversify their payment mix and focus on building their debit payment options by way of decoupled debit programs to combat this threat, the report said.
In Canada and the U.S., Hickernell already sees the growing popularity of less expensive payment methods such as PayPal catching on.
Such online payment modes are being “increasingly being used by small businesses and chain stores that conduct business over the Internet,” he said.
The main advantages of PayPal and similar applications are ease of use, a large network, and the considerably lower transaction fees.
“Generally, merchants are not charged a fee for normal transactions or are required to pay a nominal amount if PayPal transactions are done with a credit card.”
A much older method but also welcomed by many retailers is the use of electronic cheques. This method, also called electronic banking, enables a buyer to draw money from his or her account and directly deposit it online to the account of a seller.
A less popular option but one that held big promise is telephone billing, said Hickernell.
Early on, some telephone companies had established payment services to allow users of landline units to pay for goods and services using the telephone networks.
“This offered a reliable service and convenience but was unfortunately associated with adult chat lines and the porn industry, so it fell out of favour.”
Celent says large retailers with substantial market clout such as Wal-Mart will soon create competition for banks and carriers. Already, many retailers are issuing their own pre-paid cards to customers for use in the retailers’ stores.
A chain like Wal-Mart has several advantages going for it: it has massive scale to dictate low prices, a large loyal customer base, and an extensive network.
“Bookstores, coffee shops, electronic stores and hardware stores are already following this model. But credit card issuers are fighting back,” said Hickernell.
For example, card issuers are using their clout to demand that certain retail locations allow only their cards to be used on the premises. “If you go to some airports, the Starbucks shop will not even accept its own pre-paid card because they are bound by an agreement to take only MasterCard and Visa.”
Mobile phones could post the biggest threat to the credit card’s supremacy, according to Hickernell.
For a viable payment option to catch on, the Info-Tech researcher said, the system would need four key advantages:
- Appeal and fit to the right demographic group
- Ease of use
- Secure, reliable and extensive network
- The ability to negotiate acceptable rates with merchants
“Today’s cell phone carriers have the first three, if they want to wrest the market from the title holder they have to achieve number four.”
In North America, countless young cell phone users are already immersed in the model, the analyst noted. “A lot of youth are already hooked on purchasing downloadable ring tones, music and other entertainment products and services through their cell phones.”
In Japan, NTT DoCoMO has been in partnership with Adobe for several years now to enable more than 15 million subscribers to download Flash-enabled content.
Various European companies are also experimenting with using cell phones as a point-of-sales device.