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CHARACTERISTICS OF A SUCCESSFUL PAYMENT METHOD: COST
Cost The payments market is two-sided, with the bank/consumer on one side and the merchant/processor on the other. There are cost considerations on both sides of the market, and any payment method needs to be cost efficient for all of the market participants to balance interests. A payment method that has excessive fees, for example, may be fruitful for the recipient but will not be efficient for the payer. 1. Merchant Side of the Market Merchant cost considerations include acceptance fees. For example, card acceptance fees, which are not just the standard merchant service charge (MSC) but can also include gateway, terminal and payments orchestrator fees. Merchants can also bear fraud liability, which often depends on customer authentication, which can be a trade-off against customer experience. In practice, a merchant’s cost of payments will depend on the competitiveness of the industry. If within consumer-to-business (C2B) debit and credit-based merchant payments there are several non-dominant payment methods and merchants have effective customer steering mechanisms, it is likely payments will be relatively cheap to accept and broadly reflect underlying costs. If there is a clearly dominant payment method, merchants are likely to be reliant on market interventions in the form of regulation or legislation to either cap prices or enforce competitive tension. For example, the card market is dominant in many countries but some regulators have increased competition within the card system by mandated co-badging, where merchants are able to route each card transaction down one of two or more unaffiliated networks. Merchants also incur potentially significant implementation/integration costs when introducing a new payment method, and also when switching off payment methods. v This can have a profound distortive effect that has the result of limiting effective competition and increasing merchant payments cost. This could be extended to the cost of switching payment processing partners needed to accept the payment method. The answer is more interoperability between payment methods so merchants can add and move between payment methods quickly at minimal cost, but this can be hard to achieve. Payment orchestrators are a relatively new industry participant who can make accepting several new payment methods easier for merchants, although they add another intermediary into the payments supply chain and can still constitute a single source of failure. Some merchants receive significant value from marketing dollars and/or shared revenue value on co-brand programs with banks. These programs can align incentives between the players in the system but face practical issues to adoption, including a situation where there can’t practically be hundreds of successful co-brand programs. In practice, only a small number of merchants successfully run these programs and can become financially dependent on them.
v Payment method partners are any stakeholder supporting implementation, such as gateways or acquirers, would likely face similar challenges
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