Last week's blog, Mobile Payments Partnerships - The Right Move for Financial Institutions, recommended; financial institutions (FI) of all sizes explore partnership opportunities and vendor strategies to ensure they are not left behind as the mobile payments industry speeds along. Opportunities and risks abound for FIs, in unison with the four credit card associations, when considering the future of the existing credit / debit card infrastructure. According to CardHub, US merchants paid $27.7 billion in interchange fees in 2010, and regulations implemented as a result of the Durbin Amendment decreased those fees to $23.6 billion in 2011. Despite the falling revenue, FIs rely on interchange fees to drive profitability for major segments of their card portfolios.
Merchants are eager to take advantage of every opportunity to reduce the interchange fees, and consumers will realize trickle-down benefits of reduced merchant costs. Many solutions in the emerging mobile payments landscape greatly reduce, or eliminate, interchange fees. P2P and stored value models provide the consumer and the merchant efficient, low-cost transactions while enabling loyalty programs that potentially replace existing credit card rewards and miles programs. Starbucks has been tremendously successful enabling Starbucks cards on a dedicated mobile application. Perhaps, the greatest threat to the interchange revenue stream is the still-confidential Mobile Wallet partnership of Wal-Mart, Target, and two dozen other retailers. A multi-merchant, direct payment solution with the success of Starbucks' program would greatly erode interchange revenue.
As FIs establish mobile payment strategies, the risk of lost interchange fees is a critical consideration. Merchants and consumers must receive value for their continued contribution to interchange fees and resulting FI and card association profitability. Card-based solutions must be as convenient, or more convenient, than P2P and stored value alternatives. Merchants must receive value for their interchange fee investment. Some programs offer creative benefits to merchants; School Spirit Pays returns profits to the community in terms of donations to school groups. Similarly, financial institution reward programs must provide consumers with benefits preferable to retailer loyalty programs.
In addition to maintaining interchange fee income, preservation of the card-based environment allows FIs and their partners to "own" transaction data, which will provide tremendous value. Return to the CapTech Blogs site to explore the inevitable data war.