66
67
CMSPI – IAC State of the Industry Report
CMSPI – IAC State of the Industry Report
2.5%
existing merchant account, transacting via a card-on-file, and shipping to a known address, digital transaction may be highly secure. The evolving landscape of card payments, especially for CP and CNP transactions, underscores significant cost differentials. As ecommerce becomes more prevalent, the associated costs in the payment system are on the rise. With ecommerce growth at 79% and a 21bps cost differential between CP and CNP in the U.S., merchants and industry stakeholders must navigate these cost and fraud liability differentials when developing and executing payment acceptance strategies. Section 3.3.2 – Card-Not-Present Operational Complexities: Transaction Authorization, Capture, and Settlement When a customer initiates an online, card-not-present payment, there is more variability in how a merchant may select to manage the transaction as compared to in-store POS payments. One of the most common online order fulfillment flows is outlined below.
2.0%
1.5%
1.0%
0.5%
0.0%
U.S.
Canada
Australia
Credit CP Average Interchange
Credit CNP Average Interchange
Graph 3.7 – CP and CNP Average Credit Interchange Fees 102
The merchant sends an initial transaction authorization request to the card issuing bank via the merchant’s acquiring partner. This is to check if the consumer has the funds available to make the purchase.
1
In the U.S., CMSPI has identified the average interchange and network fee cost difference between CP and CNP transactions was 21bps for credit cards and 58bps for debit cards in 2023. Worldpay numbers suggest that ecommerce as a share of all ecommerce increased from 9% in 2019 to 15.4% in 2023. Like-for-like, this increased interchange and network fees by an estimated $2.4 billion for U.S. merchants in 2023. 103 104
The merchant confirms inventory of the goods and is ready to ship the purchase. The acquirer sends a “capture” request to the issuer to collect the authorized funds from the cardholder’s bank, effectively placing a hold on the customer’s funds. Capture kicks off the settlement of funds withdrawn from the consumers account and credits them to the merchant’s account less interchange, network, and processing fees. 106 107 108 The time period between that initial authorization request and the final transaction settlement can be lengthy and has the potential to be wrought with fees based on transaction management rules dictated by the global networks. Taking the example of a transaction for an out-of-stock good, there are a few ways the merchant could manage the transaction: 109 2 3 4
The original card-not-present premium interchange rates borne from concerns over fraud and abuse on telephone and fax card orders, as well as recently introduced digital-focused network fees 105 , may not commensurate with today’s computing environment where transaction stakeholders have enhanced capabilities to efficiently and securely manage card- not-present digital payments. In some instances, such as when a customer is logged in to an
102 CMSPI estimates and analysis 103 Source: Kansas City Fed, CMSPI estimates
104 This is based on 2022 fee differentials between card present and CNP transactions and does not include the effect of, for example, incremental digital fee network and interchange fee increases during the time period between 2019 and 2022 105 https://www.lexology.com/library/detail.aspx?g=7ca38dbe-897b-493c-ba2c-81daa3c11db4, https://stax- payments.com/blog/visa-interchange-rates/#:~:text=As%20of%20October%2C%20Visa%20introduced,fee%20 of%20%240.0025%20per%20transaction.
106 Payment processing: How payment gateways get you paid | Authorize.net; 107 What is authorize and capture? | Checkout.com; 108 Card authorization explained: How does it work? | Stripe 109 These options are non-exhaustive.
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