Low Costs vs Compromised Security: The Payments Space Dilemma

Late last month, the Wall Street Journal reported that payments technology juggernauts like Visa Inc. V and Mastercard Incorporated MA intended to hike credit card fees paid by merchants when they accept cards from customers, which were expected to materialize in October and April. However, the companies avidly disagreed with the claims and painted a picture that asked some credible questions.

CMSPI, a consulting firm, told the Wall Street Journal that the new fee structure will likely boost costs to merchants by an additional $502 million per year. More than half of that amount would come from network charges, while interchange fees, commonly known as swipe fees, were expected to provide the rest.

Per Nilson Report, last year, U.S. merchants paid around $93 billion to Visa and Mastercard in credit-card fees, which surged from the 2012 level of $33 billion. It should also be noted that the volume of digital transactions has significantly jumped during this time, along with the revenues of the merchants.

Mastercard stated that it has no intention of hiking network fees or interchange rates in the United States this fall. Visa said through a blog post that its overall interchange fees on its network remained flat for the past ten years. It also pointed out some programs it launched to reduce interchange fees. Last year, it decreased fees by 10% for 90% of businesses in the United States. The company currently carries a Zacks Rank #3 (Hold).

The Puzzle

Increased competition in the payment processing market can potentially reduce swipe fees for merchants, which the regulators and legislators have been talking about for some time (Credit Card Competition Act bill), but it can negatively impact security. As cheaper payment does not automatically translate to the same or higher level of security, which is already being provided by companies like V and MA, it can push merchants and other stakeholders in the payments space to increase fraud detection and security-related investments.

With growing digital transactions, attempted frauds and security threats increased many folds, leading to higher demand for better and more effective security technologies and related R&D, which comes with expensive price tags. It will likely be difficult for some smaller rivals to cough up such amounts from the get-go.

Moreover, lower credit card processing fees can affect rewards programs and similar services. To compensate for lower revenues from processing fees, financial institutions, including credit card issuers can cut back rewards, which will impact the consumers.

What About the Smaller Merchants?

The legislators argue that the new measures will inject competition in the payments space through the usage of alternative credit card processing networks, which will likely increase the decision-making power of the merchants and break up the duopoly. This can reduce costs for merchants, which is crucial, especially for the smaller ones who were badly hurt during the pandemic and from inflationary pressures.

Lower credit card fees are expected to provide some impetus to the margins of small businesses, which account for the vast majority of the total U.S. businesses. This is important, keeping in mind that the U.S. unemployment rate was at 3.8% in August, up from 3.5% at 2022-end. Although the latest rate is well below 5.2% witnessed in August 2021, it is still the highest since March 2022.

As both sides have some valid points, all eyes are on the legislative developments waiting to see how the situation plays out.
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