August 19, 2016
Guest Perspective: The Future of Payments – We Need a Paradigm Shift
By Bill Deichler, Manager, Payment Methods, Murphy Oil USA
We are all very familiar with the history of plastic for payments—first credit and then debit cards. Historically payment cards were a financial institution play to help merchants expand both the frequency and the amount of its customers’ purchases. It has rolled along pretty smoothly for a number of decades.
Then came the rapid increase in product pricing (interchange)—especially in the petroleum sector—and the cost of those card purchases grew to unacceptable levels. Some interchange categories exceed 40 percent of the net margin and 13 percent of the gross margin of a petroleum retailer and it currently represents the second-highest operating expense after labor.
How did the merchant community handle this unfair expense? It took an unheard of step and asked to be regulated by Congress! Can you believe this? One of the most entrepreneurial segments of our economy went begging for regulation. And they got it—perhaps not exactly what Congress mandated, but what the Federal Reserve felt was fair.
Now, where are we?
My personal belief—and, for the record, not my company’s—is that we need a true paradigm shift. We need to reimagine the cost structure of the payment world.
I have been using this analogy for the past few weeks: We are witnessing Toto pulling back the curtain on the wizard in the Wizard of Oz. We now can see that the charges merchants are being billed not only are unwarranted, they are downright burdensome to the health of the retailer—and, to the extent they are passed on in increased prices, the consumer.
Why can we see this now and why can it change? Historically, due to limited computer capability, only the largest financial institutions had the wherewithal to accomplish the processing of card transactions. But, the speed and storage capacity of current computing solutions has opened the door to a multitude of potential payment platform providers.
I believe the future is ACH (automatic clearing house). All funds for payments could leverage the ACH network between financial institutions and merchants. The beauty of the platform is it is not volume based. Given enough transactions, the cost can fall to pennies per transaction. Granted, the transfer of funds in not the only cost in payments. I contend that when you include all costs (customer service, processing, time value of money, risk, etc.) the true cost of a debit transaction is between 7 and 10 cents and the true cost of a credit transaction is in the 0.40 percent – 0.80 percent range. Those numbers are far below what merchants are paying today because the Federal Reserve Bank provides competition to private ACH networks, such as NACHA.
Used properly, this payment format provides the merchant community the customer information to facilitate both geo-marketing and geo-fencing, based on the individual customer’s market basket. These marketing techniques will facilitate greater connection and expansion of the merchant – customer relationship. Another benefit is that ACH transactions should be outside of PCI scope, as they are not routed through traditional card-network channels.
But, how do we actualize this paradigm shift? How do we get customers to trade in their traditional plastic and help merchants reduce operating costs, improve profitability and reduce the price they pay for our products?
First, we can incentivize their adoption of the new payment method, whether on a mobile platform or plastic. But, long term we need to have an open platform to negotiate in good faith with our financial partners (processors, networks, and, financial institutions).
Which group will start the movement? I doubt the financial institutions would jeopardize their card profits. Consumers? Doubtful. Their favorite gadget hasn’t been enough of an impetus to cause a payment migration.
So, it must be the merchant community. But, are we willing to make the move? If the answer is yes, in which direction will we move and with which players?