Interchange Agida- Mixed Messages at the Point of Sale

As Americans gradually emerge from quarantine- whether self-imposed or government-mandated- it remains to be seen how consumers’ relationship with Main Street merchants has changed for the long run. Conventional wisdom holds that existing market trends toward digitization received a 12- to 18-month jolt forward from the pandemic. These changes encompass higher e-commerce volumes and order-ahead app usage as well as shifting payment preferences (contactless, cash-free) at the point of sale.

It certainly seems irrational to expect behavior to magically revert to past patterns as if nothing had ever happened. On the other hand, if old habits don’t return to at least some extent- particularly in terms of patronizing local storefronts- we’ll have far bigger challenges to confront than the choice of payment instrument. Early data implies there’s probably no straight-line path or clear-cut answer to these puzzles.

Cash usage declined markedly in 2020, causing some to declare that the long-awaited “death of cash” had finally arrived. Federal Reserve research indicates that last year’s cash decline wasn’t much greater than one would expect given a sudden decline in onsite shopping, however- after all, cash isn’t a viable option for e-commerce purchases. A new BAI survey conducted since the pandemic revealed that over one-fifth of US consumers still prefer to use cash, roughly the same as did in 2019. More surprisingly, Gen Z users are the most partial to cash (ranking it second only to debit cards) while Boomers show the lowest cash affinity. Apparently, the endgame’s not as simple as waiting for age to wring cash from the system.

Another area to watch is debit vs. credit card usage. For many years, debit volumes have grown at a faster clip than credit. This trend took an added turn during the pandemic when revolving consumer credit card debt fell by more than 11 percent. This does not necessarily mean credit card spending was down, but rather that Americans chose to pay down more of their outstanding balances- perhaps using stimulus checks. Revolving balances ticked upward in February; it will be interesting to monitor the coming months to determine whether the longstanding upward trend returns.

Naturally, credit card issuers earn money from the interest on outstanding balances. They also earn a small fee for each transaction- an amount that’s larger for credit than debit card transactions, the latter having been the focus of 2010’s Durbin Amendment. With a new administration in Washington rumors of a Durbin v2.0 have surfaced, potentially ensnaring credit rates this time around. Financial institutions are watching these developments closely, given the outsized role interchange plays in non-interest income.

Ironically, after winning the right to surcharge consumers for card fees and route transactions to lower-cost networks, many merchants seem less attuned than before to their underlying payments costs. While grocers and “big box” retailers likely have the financial incentive and IT bandwidth to negotiate preferable rates and optimize routing, many merchants now pay a blended rate without regard to card type, opting for simplicity and leaving their processor to sort out the details with the card networks.

With even midsize merchants often unclear on payment dynamics, it’s no surprise that legislators can be ill-informed. In March, leading card networks and processors launched a new industry group in hopes of addressing this information gap. On our recent BIGCast I spoke with Fiserv’s head of Government Relations Kim Ford about the mission of the Payments Leadership Council and its hiring of CFPB veteran Raj Date as Executive Director.

Next week I’ll share a variety of mixed messages I’ve seen at the point of sale, and explore what they say about US payments attitudes. If you have any anecdotes to share or questions to pose, please send them along!