Under the status quo, banks and card networks take a percentage of each card payment, and during the pandemic, almost all retail payments were made by card.
The COVID-19 pandemic has accelerated everything digital, from how we shop to how we pay. Use of contactless cards and mobile payments by consumers worried about surfaces they touch has exploded. New hardware, software, and services are rolled out daily, and no idea seems too far-fetched — a Euromonitor survey conducted for the National Retail Federation found 20 percent of consumers are willing to implant a payment chip in their finger.
But for all the headlines about innovation, most of what we’ve seen has stayed largely the same under the hood. That’s because most contactless cards, digital wallets, and even chips in fingers are just other ways to use a credit card, and most still operate over the Visa and Mastercard processing networks.
Under the status quo, banks and card networks take a percentage of each card payment, and during the pandemic, almost all retail payments were made by card. Fees charged to merchants total over $100 billion annually and drive up consumer prices by hundreds of dollars for the average family.
Changing the norm
Government agencies are starting to do something. The Department of Justice derailed Visa’s attempt to buy and bury Plaid, which supports apps like Venmo that let consumers send money to friends or retailers without using expensive networks like Visa. Both the DOJ and Federal Trade Commission are investigating whether banks are circumventing pro-competition federal law that gives merchants the right to choose where to route debit card transactions for processing. The Federal Reserve recently said routing choice has been blocked online and is developing regulations clarifying that routing rights apply online the same as in stores. And there’s talk of expanding routing choice to credit cards.
Some alternatives to Visa and Mastercard have appeared, such as buy now, pay later (BNPL). Unfortunately, BNPL processing fees can be far higher than card fees, severely limiting their usefulness. There’s also talk of cryptocurrencies like Bitcoin changing payments. But while cryptocurrencies might be a tempting investment, they lack the stability, wide use, and acceptance needed to be true currencies.
One option with huge potential is the FedNow “faster payments” system being developed by the Federal Reserve, which could provide a direct link between retailers and consumers that would end card companies’ near monopoly. Perhaps the Fed should also create a “sandbox” to give nonbank fintech innovators — operating under proper supervision — a better chance to get into the game.
The pandemic has brought an inflection point where we can either foster true innovation or just let the big card networks continue to run everything. As we think about payments, we must realize innovation isn’t about new card readers, high tech, or even chips in fingers. It’s about ending monopolies that stand in the way of progress. The time to demand true innovation and competition has arrived.