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Charts: Growth of Global Payments, Cryptocurrencies

The business of sending and receiving retail and wholesale payments is booming worldwide. That is according to the Boston Consulting Group’s “Global Payments 2021: All In for Growth,” (PDF) its 19th annual report on the payments industry.

Credit card acquirers (i.e., merchant account providers), processors, and networks experienced only slight revenue declines at the outset of the pandemic. The broader shift to digital commerce has given rise to thousands of financial technology players, such as buy-now-pay-later, direct software integrations, various cashless-payment providers, cryptocurrencies, and more. The result is projected strong 5-year growth for global payments-related revenue.

According to the BCG report, by 2030 the total global revenue from payment transactions will nearly double to $2.9 trillion by 2030, up from roughly $1.5 trillion in 2020.

The report also addressed the growth in payments by global region.

Cryptocurrency

McKinsey & Company, the global consulting firm, surveys U.S. consumers annually for insights on digital payments trends. The 2021 survey addressed crypto. Twenty percent of respondents stated they held or have held cryptocurrencies, up from 6% in 2020. Their reasons are set forth below.

Cryptocurrency use varies dramatically worldwide. An index from Chainalysis, a blockchain data and research firm, shows the overall global adoption by country.

The index scores countries on three metrics: total crypto activity, trading activity of non-professional users, and peer-to-peer exchange trade volume. All are weighted by purchasing power parity per capita. The Chainalysis index ranges from 0 to 1. We have multiplied the scores by 100 to facilitate the map below.

Most of the top 20 countries are emerging economies, including Togo, Colombia, and Afghanistan. Overall, Vietnam scored the highest. The U.S. slid from sixth to eighth and China, which has cracked down on cryptocurrency, fell from fourth to 13th.

According to Chainalysis, many global residents turn to cryptocurrency to protect their savings against currency devaluation, as well as to send and receive remittances and conduct business transactions.

Expand Payment Options to Convert More

Essential features for many online stores in 2022 include enhanced chatbots for high-end customer service, virtual product sampling, and real-time order tracking. But what happens once shoppers reach the checkout page is equally important. Plenty of issues can interrupt the process, driving cart abandonment.

One such obstacle is limited payment options. The ecommerce sophistication of post-pandemic consumers lit the pathway to single-page checkouts that convert in seconds.

And those checkouts must accommodate how shoppers want to pay.

Buy Now, Pay Later

Buy now, pay later is booming, with nearly a third of Generation Z (ages 15 to 35, roughly) reportedly preferring it. The popularity of BNPL skyrocketed in 2021. And the lack of risk — most providers (i.e., Klarna, Affirm, Afterpay, many more) pay merchants upfront — makes up for the slightly higher fees.

To boost sales, incorporate BNPL options on product pages and at checkout.

Mobile Payments

Mobile payment options include wallets such as Apple Pay and WePay as well as “contactless” payment apps such as Venmo, PayPal, and Zelle. All offer benefits to both consumers and merchants, especially for checkout speed and security, as the payments rely on passwords and single-use tokens, eliminating a customer’s need to enter a credit card number for each transaction.

Nonetheless, merchants should still utilize fraud protection services for mobile payments. Moreover, minimizing fraud and keeping consumers safe calls for up-to-date shopping carts and order processing systems.

Accepting alternative methods requires a processor that supports mobile payments. Most merchant account providers manage at least a few, and many shopping carts include plugins for the most popular options. Stores running on Shopify can also implement Shopify’s own Shop Pay, which finalizes payment using a customer’s email address.

Single page checkout that accepts Shop Pay, Apple Pay and PayPalSingle page checkout that accepts Shop Pay, Apple Pay and PayPal

Monos, a luggage retailer, uses a single-page checkout that supports Shop Pay, Apple Pay, and PayPal.

Cryptocurrency

Consider accepting cryptocurrency if you’re eager to serve loyal, tech-savvy consumers. While there are risks, most can be thwarted by managing crypto’s volatility and conversion into fiat money.

Cryptocurrency has advantages over standard credit card and mobile payments processing:

  • Acceptance fees are typically less. In many cases, the currency is held in a wallet, so you only pay fees when the crypto is withdrawn or converted.
  • Crypto transactions are immediate and irreversible. While you could face backlash from the crypto community for not providing excellent service, you can avoid chargebacks entirely. Thus merchants selling unique, high-value items could benefit.
Checkout buttons for credit card, crypto and mobile wallets.Checkout buttons for credit card, crypto and mobile wallets.

Newegg supports paying via credit card, crypto, PayPal, and BPNL.

But, again, accepting cryptocurrency has downsides. It requires additional layers of security to protect consumers. Stores with legitimate higher return rates may want to avoid the payment method altogether. And uncertainties about future regulation should also be considered.

Convert More

The rise of mobile commerce and the elevated expectations of post-pandemic shoppers necessitate payment flexibility. Paying quickly, directly, over time, or via nontraditional currency is attractive to many buyers. The result for merchants is more conversions, higher order values, and fewer abandoned carts.

15 Mobile Payment Systems for Merchants

Mobile payment systems provide flexibility to consumers and merchants while unifying online and offline operations.

Here is a list of mobile payment services for merchants. There are point-of-sale systems, digital wallets, mobile hardware, software for mobile and web applications, and more.

PayPal Zettle

Home page of PayPal ZettleHome page of PayPal Zettle

PayPal Zettle

PayPal Zettle is an all-in-one point-of-sale system for small businesses, in-store or on the go. Take payments (cash, card, chip-card, and contactless) and track sales and inventory from anywhere via your PayPal Business account. Price: 2.29% + 9¢ per transaction.

Square

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Square

Square lets you take payments in person, on the go, or online. Create and send invoices, and then allow customers to pay by card or ACH bank transfer. Add pick-up and delivery options, or sell through social media. Square’s hardware options for point-of-sale transactions are a terminal, a reader for contactless and chip, and a reader for magstripe. Price: 2.6% + 10¢ (in-person), 2.9% + 30¢ (online), per transaction.

Google Pay

Google Pay

Google Pay is a digital wallet and online payment system. Google Pay enables quicker, safer checkout in apps and websites and makes it easy for customers to pay contactless with their phones. Google Plex is a digital bank account in Google Pay, offered by participating banks and credit unions. Price: Free.

Braintree

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Braintree

Braintree lets you accept cards, PayPal, wallets such as Venmo (U.S.), Apple Pay, and Google Pay, and enable buy now and pay later options. Accept in-person payments with various PayPal Here card readers by integrating the PayPal Here SDK into your mobile point-of-sale app. Choose from basic or advanced fraud tools, and add 3-D Secure for an additional layer of fraud prevention. Safely store billing info to facilitate repeat payments. Price: 2.59% + 49¢ per transaction.

Venmo

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Venmo

Venmo is a mobile peer-to-peer payment service owned by PayPal. Business profiles allow Venmo users to accept payments for goods and services from customers on Venmo. Customer accounts on Venmo can be linked in apps and on websites with payments processed through Braintree. Easily add Venmo as a payment option on your website. Price: 1.9%+$0.10 per transaction.

Mobiyo

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Mobiyo

Mobiyo is a European leader in mobile payments, primarily through direct carrier billing, wherein users charge purchases on their mobile phone bill. Mobiyo also processes payments through SMS, prepaid cards, electronic bank transfer, cash payment, e-wallet, credit cards, and more. Get advanced analytics to analyze performance. Contact for pricing.

QuickBooks GoPayment

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QuickBooks GoPayment

QuickBooks GoPayment provides an app and mobile card reader to get paid quickly. Accept all major credit or debit cards. Use the QuickBooks card reader to take digital wallet payments or manually enter card info with the GoPayment app. Access the full suite of QuickBooks tools to manage your invoicing, cash flow, and expenses. Price: 1% for ACH bank payments, 2,4% for swiped, per transaction.

Zelle

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Zelle

Zelle is an easy way to send money directly between U.S. bank accounts, typically within minutes. Quickly, safely, and easily send and receive money with an email address or mobile phone number. To use Zelle, your bank must offer it for your business account type. Contact your bank for availability and pricing.

Payanywhere

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Payanywhere

Payanywhere provides point of sale software, hardware, and business management tools to accept credit cards and organize your business. Use a Payanywhere device to process payments in your physical store or on your smartphone or tablet. Turn any in-person transaction into an invoice directly from the Payanywhere app, or send directly from the portal. With two funding options, choose when your business gets funded from daily credit sales. Price: 2.69% per transaction.

Authorize.net

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Authorize.net

Authorize.net helps merchants process credit card payments in person, online, or over the phone. A virtual point of sale connects a compatible card reader to your computer to accept payments in-store. Accept all payment types, including major credit cards, signature debit cards, and e-checks. Accept and submit monthly recurring or installment payments. Price: 2.9% + 30¢ per transaction.

Stripe

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Stripe

Stripe enables merchants to accept payments and manage their businesses online. Unify online and offline channels with flexible developer tools, card readers, and cloud-based hardware management. Use the SDK to integrate Stripe into your mobile and web applications to create a customized in-store checkout flow. Build a marketplace, and pay sellers or service providers globally. Price: 2.9% + 30¢ per transaction.

Adyen

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Adyen

Adyen enables merchants to accept payments in a single system for online, mobile devices, and point of sale. Accept cards, mobile wallets, and more on any digital channel or device. Create optimized shopping checkouts with in-app and mobile payment flows. Enjoy a full suite of tools to serve your customers. Securely store your customers’ previously used payment data, and keep them coming back with single-click and recurring payments. Contact for pricing.

Boku

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Boku

Boku was founded in 2009 to enable purchases for digital content on mobile phones. In 2021, Boku launched the M1ST Payments Network, combining carrier billing and mobile wallets into a single payments scheme, featuring 225-plus mobile payment types in over 70 countries. Boku features subscription bundling, mobile identity, and a suite of security tools. Contact for pricing.

LevelUp

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LevelUp

LevelUp, a division of Grubhub, is a mobile payment network used by approximately 1 million consumers and 5,000 businesses. Use LevelUp with a scanner through your point-of-sale system or via a standalone scanner with a mobile device. Enter the transaction through the LevelUp merchant app using your smartphone’s camera to read the customer’s QR code, entering the amount to complete the transaction. Price: 1.95% per transaction. Scanner is $50. LevelUp tablet is $100.

WeChat Pay

Home page of WeChat PayHome page of WeChat Pay

WeChat Pay

WeChat Pay is a payment feature integrated into the China-based WeChat app, used by approximately 1 billion monthly consumers worldwide. WeChat has Quick Pay, QR code payments, in-app web-based payments, native in-app payments, and mini-program payments. Price: Merchant processing fee is 0.6% per transaction.

The State of Cannabis Payments in U.S.

Cannabis businesses in the United States are no longer burgeoning. The industry is thriving with record-breaking sales, and projections for dramatic growth. While some states allow it, federal law classifies cannabis as illegal, thereby prohibiting its possession and use.

How does an industry flourish that is banned by federal law, shunned by the credit card networks (Visa, Mastercard, American Express), and rejected by most banks? How do cannabis retailers accept payments when credit cards and merchant accounts are unavailable?

I’ll examine those questions and more in this post. I’ll address the workarounds that payment service providers offer to cannabis businesses. Some of these benefit from gray areas in the regulations. Others use clever but risky techniques to conceal rule-breaking from banks and credit card networks.

Photo of a retail sign stating "Cannabis Shop"Photo of a retail sign stating "Cannabis Shop"

U.S. law prohibits the sale of cannabis. Thus credit card networks and U.S. banks do not accept those payments. Nonetheless, the industry is booming.

State of Cannabis Payments

The state of cannabis payments is a confusing mess of semi-viable workarounds. Credit card companies and acquiring banks will not allow their networks to process cannabis sales so long as it’s illegal federally. Cannabis retailers have limited options.

Cash is the primary payment method for cannabis sales. However, accepting cash payments comes with logistical and security challenges. Cash must be counted, stored, transported, and secured. Moreover, cash cannot be accepted online.

In-store ATMs. Automated teller machines allow customers to withdraw cash for in-store purchases. But ATMs are expensive for both customers and merchants. Customers pay approximately $5 for a single cash withdrawal. Storeowners pay about $4,000 per machine plus monthly maintenance and cash-reload fees.

Cashless ATMs are relatively new to the payments industry. They seem to have been invented for cannabis retailers. Instead of inserting a bank debit card into an ATM, the customer inserts her card into a countertop point-of-sale terminal, which authorizes the card and PIN code, and then allows the customer to make a direct payment to the merchant via an account provided by the cashless ATM provider. Merchant fees for cashless ATM transactions are reasonable. Most vendors provide the equipment and technology for $5 per month, provided the merchant has purchased a physical ATM from that vendor. However, consumer fees are not reasonable at roughly $5 per transaction. Some vendors share those fees with the merchant.

Cryptocurrencies. With exaggerated claims of anonymity and lack of government control, cryptocurrencies are seemingly ideal for cannabis purchases. But cryptocurrencies are primarily speculative investments rather than cash alternatives. Cannabis consumers — like all consumers — are mainly cryptocurrency observers, not investors.

Real-time peer-to-peer payments are immediate transfers of funds from a payor to a payee. Cannabis retailers have adopted various forms of real-time payments, mostly to circumvent the prohibition on credit card transactions. The retailer asks the customer to send a real-time bank-to-bank or account-to-account payment. Upon receiving and confirming the real-time payment, the merchant will either ship the products (an ecommerce transaction) or allow the customer to pick up his order. Merchants must be careful, however. Many P2P payment systems — PayPal, Venmo, Zelle, Square Cash App, more — including the financial institutions that maintain the merchant’s account, do not allow their networks to be used for cannabis sales. Retailers can sidestep this issue by concealing the nature of their business, and P2P providers sometimes ignore their own rules, allegedly.

Credit cards. Some cannabis retailers accept credit card payments. How is this possible? Payment providers will sometimes help by assigning cannabis transactions to legitimate categories. For example, instead of classifying as a cannabis seller, the dishonest provider will call it a flower shop or a farmers market. Other service providers will open merchant accounts with financial institutions in Eastern Europe where law enforcement is lax. In all cases, these gray-area providers charge remarkably high fees — roughly 6% per transaction on top of monthly maintenance charges. Moreover, the merchant accounts often require large reserves. Plus, merchants who mislead payment networks and U.S. banks risk penalties, account closures, and, worst of all, a permanent ban from accepting credit cards.

Ecommerce?

When cannabis becomes legal in the U.S. federally, all merchants — ecommerce and brick-and-mortar — can expect an explosion of legitimate payment providers. Until then, cash is king.

Will Central Banks Replace Cryptocurrencies?

Last month I explained why cryptocurrencies are not ready for mainstream retail. The reasons include rampant volatility, lack of regulation, and extraordinary risk. All are good for speculators but bad for ecommerce merchants.

Aiming to bring stability and perhaps avoid a financial crisis if the crypto-speculation bubble bursts, governments worldwide are considering central bank digital currencies — CBDCs.

A central bank digital currency is a country’s recognized currency in electronic form. For example, the CBDC of the United States would be the digital dollar. Today, the U.S. central bank, the Federal Reserve, issues paper bills and metal coins. Consumers use those bills and coins physically or as stored in bank accounts.

In the future, digital currency — with unique serial numbers like the dollar — could replace paper and coins. A digital dollar could be suitable for common transactions (loans, investments, salaries, retail payments) and represent the best of both worlds: the convenience of cryptocurrencies and the regulation and stability of a reserve-backed money supply.

Holders of CBDCs would presumably have digital wallets, likely on smartphones. Bank accounts would presumably remain more or less the same. A digital dollar in your checking or savings account would look the same as a paper dollar stored in those accounts. Thus the value of a CBDC would equal a country’s currency — one digital dollar would be redeemable for one paper dollar. This is unlike existing cryptocurrencies with values based on speculation and hype.

Why CBDCs?

Monetary policymakers offer several justifications for creating CBDCs, including:

  • Convenience in an online world. Cash and coins (and credit cards) are expensive to handle and store. The proliferation of real-time payments shows that consumers and businesses need simple, inexpensive, and secure ways of moving money. CBDCs could make real-time payments more accessible and reduce the burden of handling cash.
  • Prevent an international financial crisis. In China, digital payments are controlled by technology companies, namely Alipay and WeChat Pay. In Europe and North America, private investors own the majority of cryptocurrencies. If one of the major cryptocurrencies (or WeChat or Alipay) were to fail, a financial crisis would ensue. Governments are now recognizing that CBDCs can offer the benefits of cryptocurrencies and e-payments without the risks of a worldwide financial crisis.
  • Encourage innovation. Investors and inventors understand the lack of ubiquity and stability prevents cryptocurrencies’ widespread adoption. Who wants a bitcoin payment app when the future value of bitcoin is unknown? A stable, government-backed digital currency could facilitate payment and financial innovation.
  • Protect privacy and prevent crime. Cash payments are private. Card-based payments are not. Whenever we make a credit card payment, someone is watching and tracking us. If governments allow it, CBDC payments could be anonymous or semi-anonymous. Merchants, credit card companies, and financial institutions would not know who is paying (similar to cash payments). Still, governments could monitor the use of CBDCs to prevent money laundering and other financial crimes.
  • Financial inclusion and equality. Central bank digital currencies, according to proponents, would allow equal access to financial services, especially for the unbanked and underbanked. It is difficult to substantiate this claim, however. Some proponents believe that a digital dollar would not require bank accounts and credit scores. But it would require modern (expensive) smartphones and access to high-speed internet.

Hurdles

CBDCs offer much potential for good. But they could create problems, too, such as:

  • Privacy concerns and government surveillance. CBDCs would likely require digital wallets and accounts. Who has access to these accounts? But who controls and protects the data? Do consumers trust governments more than private corporations? With CBDCs, governments, including authoritarian regimes, would have unprecedented access to an individual’s transaction data.
  • Consumer protection. In the probable event of a cyberattack or honest mistakes (CBDC transferred erroneously), who is responsible, and what are the consumer protections? CBDC promoters rarely address real-world occurrences such as chargebacks, refunds, and errors.
  • Internet access. A strong, reliable, and affordable internet connection is necessary to operate any CBDC system. But such internet access isn’t universal, hindering the widespread adoption of CBDCs.

8 Reasons to Avoid Cryptocurrencies for Ecommerce

Cryptocurrencies are hot news. Visa announced that it would test a type of cryptocurrency on its network. Elon Musk proclaimed that Tesla would accept cryptocurrency in payment for its vehicles. Bitcoin’s value is soaring.

Merchants may be wondering if cryptocurrencies are ready for mainstream ecommerce. The answer is no. Here’s why.

8 Reasons to Avoid Cryptocurrencies

Problem 1: Volatility. The value of national fiat currencies such as the U.S. dollar fluctuates slightly. The buying power of the U.S. dollar, even in times of relatively high inflation, is more or less the same now as in a few months.

Cryptocurrencies, on the other hand, are remarkably volatile. One year ago, bitcoin traded at roughly $10,000. Today, it trades at approximately $60,000. It’s the equivalent of 17 cents expanding to $1.

To overcome volatility, the cryptocurrency industry has created stablecoin, a type of cryptocurrency that has its value tied to a more stable asset such as the U.S. dollar or gold. However, stablecoin is not yet widely adopted, in part because crypto speculators do not like stability as it harms their earning potential.

Despite what crypto proponents claim, the possibility of a meaningful drop in the value is frightening. It’s too great of a risk for small- and medium-sized ecommerce merchants.

Problem 2: No rewards. Consumers use credit cards, in part, to earn cash-back and point-based rewards. Issuers offer these incentives to motivate consumers to pay with cards. There is no large-scale crypto equivalent to Citi’s Double Cash card or Amazon’s Prime Rewards Visa, or any of the hundreds of other popular loyalty programs. The lack of those programs is a disincentive to use crypto for routine payments.

Problem 3: No consumer protection. Chargebacks are expensive and time-consuming for merchants. Nonetheless, they are an important part of the credit card ecosystem. Knowing that they are not responsible for fraudulent credit card purchases gives consumers confidence. Crypto payments have no such protections. A customer has no recourse if the merchant does not deliver on its commitments. Merchants have no legal or contractual obligation to refund a crypto purchase, although they may choose to do it. A consumer could presumably sue a merchant, but it’s unlikely.

Problem 4: Not universal. Cash is universal. Credit and debit cards are universal. Cryptocurrency is not. There a slew of cryptocurrencies, but using crypto payments for retail purchases remains an anomaly. Only a handful of payment gateways (and even fewer point-of-sale terminals) process crypto transactions. Bottom line: Cryptocurrencies are too difficult for consumers to obtain and for merchants to accept.

Problem 5: Fragmentation. There are approximately 5,000 cryptocurrencies. Banks, payment processors, and merchants are largely unsure how to process the thousands of available options. New “coins” pop up seemingly daily. Which ones should merchants accept? What if a consumer wants to pay with the latest cryptocurrency, but the payment gateway cannot process? In contrast, consider national currencies. Most large financial institutions deal with about 150 sovereign currencies, at most. The United Nations recognizes 180.

Problem 6: Expensive. Typical rates for accepting cryptocurrencies for online purchases are about 1 percent, roughly 1 percent lower than most credit cards. However, accepting crypto becomes expensive when integrating and maintaining a separate payment gateway and adding currency-conversion fees. The latter point, converting cryptos to fiat currencies, is the real catch. Merchants should carefully consider that cost as the rates are generally high, wiping out the savings from the low transaction fees.

Problem 7: Security risks. Cryptocurrency is essentially digital cash. Stolen credit cards and bank accounts are gigantic headaches. However, unless the account holder was negligent, the issuer or bank will return the money. But not so with cryptocurrencies. Once stolen, cryptocurrencies are gone forever — with no recourse. Thus holders of cryptocurrencies must add security measures to protect their accounts.

Problem 8: Coming regulation. National and local governments worldwide are contemplating taxing, banning, limiting, or controlling cryptocurrencies. Several countries are in the early stages of creating their own national cryptocurrencies, called CBDCs (central bank digital currencies). Interested merchants and consumers should let the dust settle.

Pros, Cons of Credit Card Surcharges

Credit card processing is expensive. “Surcharging” allows merchants to recoup some of the cost by passing a fee to customers at the point of sale.

Some U.S. states, however, ban surcharging. One of those was Kansas before a U.S. District Court recently overturned the State of Kansas’s ban. Colorado, Massachusetts, and Connecticut are now the only states to prohibit surcharges.

In this post, I’ll explain surcharging. I’ll address the rules and the pros and cons for merchants wishing to apply surcharges as a way of recovering credit card processing fees.

Surcharging

Surcharges can be applied to card-present (in-store) and card-not-present (ecommerce) transactions. The surcharge is typically equal to the merchant’s card-processing fee, but it can be lower.

Say a customer pays for a $100 ecommerce purchase with a credit card. A typical processing fee for this transaction would be roughly $3.10. Applying a surcharge would allow the merchant to recoup the fee so that the customer pays $103.10 instead of $100.

Surcharging is far from perfect. It does not solve the problem of expensive processing. It just passes that fee to customers. Many will refuse to pay it.

Surcharging is common in certain industries, however, such as charities, colleges, and governmental entities.

Surcharging is regulated by the card brands — Visa, Mastercard, American Express, and Discover. Businesses that do not comply with those rules violate their merchant-processing agreements and risk being expelled from the card networks. Moreover, surcharges can damage a merchant’s reputation as abuses are usually called out on social media!

Rules

Here is a summary of the card brands’ rules for surcharging.

  • Inform the customer. Merchants must inform customers that surcharges may be levied. A note buried in the terms and conditions is not good enough. Physical stores must post clear signage at the store entrance and the point of sale. Ecommerce merchants must clearly identify and explain the surcharge and display it as a separate line item.
  • Limit the amount. The surcharge must not exceed 4 percent of the purchase price.
  • No profiting. A merchant cannot profit from a surcharge. The fee can cover the expense of processing but not more.
  • Use a single transaction. The surcharge and the purchase must be processed in the same credit card transaction, not separate. Submitting separate transactions would confuse many customers when they receive their statements.
  • Separate line items. The receipt must display the surcharge clearly and as a distinct line item.
  • Credit cards only. Merchants cannot apply a surcharge to debit card transactions.

Pros, Cons

Merchants should weigh the benefit of recovering credit card fees against the possibility of losing customers and damaging the business’s reputation. An additional issue is the expense. Surcharges are not free. Merchant service providers generally charge a fee for the service.

Digital Payments in China Are Cheap and Convenient

In “China Is Dominating Ecommerce,” contributor Marcia Kaplan addressed that country’s innovation in online shopping. Digital payments in China are equally innovative. I’ll address what that could mean for North American merchants in this post.

Lesson 1: High Fees

High credit-card fees motivate merchants to look for alternatives. Lower fees drive profits and investments.

Consider the average fees a merchant in China can expect to pay for processing three popular payment methods.

  • WeChat Pay, the most popular payment method, is accepted by 72 million merchants in China and claims to process over 1 billion transactions every day. WeChat Pay’s average merchant processing fee is 0.6 percent.
  • Alipay, China’s second most popular payment app with usage statistics similar to WeChat Pay, has an average merchant fee of 0.55 percent.
  • China Union Pay, China’s most popular credit card, has an average merchant fee of 0.8 percent.

The average card-present fee in North America is approximately 2.2 percent; card-not-present is roughly 3.5 percent. Thus the difference is clear: North American merchants are paying a lot more to process fewer transactions. (There are approximately 100 million daily credit card transactions in the U.S. versus 1 billion in China.)

To be sure, the incredible growth of ecommerce and mobile payments in China cannot be attributed exclusively to reasonable transaction fees. However, if fees in China were similar to those in North America, adoption would presumably be much lower.

High merchant fees could eventually prompt North American merchants to:

  • Seek alternatives to card-based payments. An example is the Starbucks mobile wallet. Customers load funds into their accounts and use those funds (plus loyalty-based rewards) to pay for purchases. The stored funds allow Starbucks to avoid interchange and card-assessment fees on every purchase. Expect other merchants to adopt their own stored-value wallets and reloadable gift cards.
  • Call for more regulation on card brands (Visa, Mastercard, American Express, others), including more antitrust lawsuits.
  • Adopt less expensive payment methods, such as debit cards, direct-from-bank payments, and peer-to-peer payments.

Lesson 2: Consumer Credit-card Debt

Crushing credit card debt causes consumers to look for alternatives.

Credit card debt is as much of a problem in China as in North America. In 2020, Chinese cardholders accrued roughly $2.5 trillion of credit card debt; Americans accrued $930 billion.

In 2019, recognizing the risk of credit card debt to the country’s economy, the Chinese government capped credit card interest rates at 12 to 18 percent, depending on the type of card. Those rates are more or less in line with North America.

Nonetheless, excessive debt continues to plague consumers in China and North America, which could drive shoppers to “debt-free” alternatives, such as:

  • Debit cards and direct-from-bank payments, which allow consumers to make purchases only if sufficient funds are in their account. Merchants should expect more debit card payments and more bank-based payments.
  • Buy-now-pay-later, while still a form of credit, may help consumers manage their debt. Despite the relatively high fees, merchants are accepting BNPL payments as shoppers are looking for alternatives to card-based debt.
  • Prepaid cards, which could gain wider acceptance because they act like credit cards but do not allow consumers to pay with money they do not have.

Lesson 3: Point-of-sale Hardware

In China, payment apps such as WeChat Pay and Alipay use QR codes. A reported 98 percent of urban Chinese consumers use their digital wallet for daily purchases. Most consumers do not carry cash.

The result is that Chinese merchants are not burdened by expensive registers and point-of-sale equipment. Merchants simply display QR codes for customers to scan.

North American brick-and-mortar merchants could reduce equipment costs by implementing QR code-initiated payments, such as from PayPal and Square.

Lesson 4: Super Apps

In China, entertainment, shopping, social media, payments, and more are combined in “super apps” — typically WeChat. Chinese consumers use one app for:

  • Internet surfing,
  • News consumption,
  • Chat messaging,
  • Payments and money transfers,
  • Shopping,
  • Social media,
  • Image sharing,
  • Gaming,
  • Entertainment.

North American consumers use a single app for one or two purposes, typically. An example is Instagram for sharing images. Only recently has Instagram expanded into shopping and payment acceptance. Perhaps Amazon will evolve into super app status by combining entertainment with shopping.

Despite the political rhetoric in the U.S. to break up Big Tech, merchants should closely monitor the emergence of super apps. If they become anywhere near as popular as in China, those apps could help merchants reach enormous audiences.

What Merchants Should Know about ISOs

The pandemic-induced shift to online and contactless payments has been a boon for credit card providers and their sales agents. The industry depends on those agents, called “independent sales organizations” — ISOs — to market payment services to businesses.

In this post, I will examine the role of ISOs. Understanding how ISOs operate will help merchants secure the best payment processing.

This follows from my 3-part series on credit card processing, which explains the participants and pricing methods and offers money-saving suggestions. My 2-part primer on merchant accounts addresses their purpose and how to select the best provider.

Why ISOs?

Acquiring banks and payment processors rely on ISOs to sell their services. A good ISO will use its experience in an industry to tailor solutions for merchants. ISOs that specialize in payment processing for restaurants are an example.

ISOs can sell the services of many merchant acquirers and payment processors, picking and choosing the best solution for a merchant. ISOs are similar to independent insurance agencies that find the best policies for their clients.

ISOs are supposed to understand the circumstances of their merchant clients and propose suitable solutions, such as pricing, equipment, and technology. The best ISOs take the time to understand their clients and build long-term relationships.

ISOs must register with the card brands — Visa, Mastercard, American Express, Discover. Registration fees are approximately $5,000 per year, per brand. ISOs frequently have their own agents, who do not have to register.

ISOs range in size. Some are huge, with hundreds of agents and employees; others are small, with just a few employees or even one employee. Larger ISOs sometimes subcontract parts of their business to smaller ISOs. To add to the confusion, Visa and Mastercard do not use the acronym ISO. Instead, Mastercard uses MSP (member service provider), and Visa uses TPA (third-party agent).

How ISOs Make Money

Understanding how ISOs are compensated will help merchants receive the best pricing and services. ISO revenue comes from:

  • Residuals, which are a percentage of the fees that merchants pay for payment processing. Every time a merchant accepts a payment, the ISO receives a residual. Residuals are the primary revenue source for most ISOs.
  • Value-added upselling, which are commissions from selling additional services, such as fraud verification, enhanced reporting, and point-of-sale accessories.
  • Bonuses from new sign-ups, which can range from $400 to $5,000 per merchant.
  • Selling portfolios. ISOs can sell their merchant portfolios to private investors or other ISOs. The price depends on potential residuals. Merchants should check their agreements carefully to ensure that pricing and service levels do not change if their account is sold.

ISOs: Good vs. Bad

I’ve worked in the payments industry for roughly 20 years. Most ISOs and their agents are honest, hard-working experts who want their merchant clients to succeed. Unfortunately, a few are not.

Good ISOs:

  • Review merchant statements frequently, looking for ways to reduce fees.
  • Provide expertise based on the merchant’s industry.
  • Sell products and services that help the merchant, regardless of residuals and bonuses.
  • Proactively help merchants.
  • Explain their contracts in detail, ensuring the merchant understands the terms.

Bad ISOs:

  • Use aggressive, high-pressure sales tactics.
  • Do not explain the fees, service levels, and terms and conditions.
  • Sell unnecessary services and equipment.
  • Disappear after the contract is signed.

Tips for Merchants

When dealing with ISOs:

  • Understand the fees. I’ve seen fees that start low but increase over time and other bait-and-switch sales tactics.
  • Remember that ISOs and their agents rely on residuals and bonuses. Make sure an ISO-recommended product is good for your business.
  • Review the contract carefully and retain the final, executed copy.
  • Ask as many questions as necessary. There are no stupid questions. A good salesperson will answer professionally and politely.
  • Inquire whether the ISO intends to sell your account. Understand your rights if that occurs.
  • Compare the offer to other ISOs.
  • Recognize that an ISO may not fit your business. Moreover, smaller ecommerce operations, micro-merchants, and occasional sellers likely will not benefit from an ISO and would be better off relying on end-to-end service providers such as PayPal, Square, and other peer-to-peer services.

Does Buy Now, Pay Later Threaten Credit Card Issuers?

Capital One recently announced that it would ban the use of its credit cards to fund buy-now-pay-later transactions. According to a Capital One spokesperson, BNPL purchases “can be risky for customers and the banks that serve them.” In this article, I will examine Capital One’s claim.

How It Works

Buy now, pay later allows approved customers — online or in-store — to defer the payment for goods and services. BNPL providers pay the merchant in full immediately, minus a service fee. The customer pays the BNPL provider in agreed-upon installments charged to the customer’s credit card.

BNPL is an easier, more transparent way for many consumers to consummate a purchase. Credit cards are plagued by hidden fees, compounding interest, and poorly-explained penalties. BNPL is different because fees, rates, and payment schedules are displayed clearly and explained in simple, customer-friendly terms. Importantly, there are no interest charges for the customer.

For the merchant, accepting BNPL is similar to credit cards. Merchants pay a fee to the BNPL provider of 4 to 8 percent, typically. The provider settles directly with the merchant. The merchant receives the proceeds of the sale regardless of the number of payments made by the customer.

BNPL fees (4 to 8 percent) are much higher than credit cards. However, unlike credit cards, the BNPL provider — not the merchant — carries the risk of fraud and chargebacks. In other words, when it completes a BNPL sale, the merchant can be certain that it will receive the payment even if the transaction is fraudulent.

BNPL Too Risky?

BNPL is apparently too risky for Capital One. Let’s analyze.

Capital One has roughly 62 million credit card accounts under its control — among the largest in the U.S. As an issuer, Capital One earns revenue by charging merchants an interchange fee and by charging consumers interest and fees on their credit card debt.

Issuers assume the risk of cardholders not paying the balance. Buy now, pay later increases that risk because issuers cannot profit from interest and late fees. (Issuers also face competitive pressure, such as low-free debit cards, reloadable wallets, gift cards, and crypto-currencies.)

Capital One’s statement that BNPL “can be risky for customers and the banks that serve them” is true in a sense. Certainly BNPL is an easy way for consumers to assume debt quickly. All excessive personal debt — credit card, BNPL, home mortgage — is dangerous. However, there’s little difference to consumers between credit cards and BNPL other than the former accrues interest and fees on unpaid balances.

What’s unspoken in Capital One’s announcement is that it collects only interchange fees from merchants when consumers make BNPL purchases. But when consumers take on credit card debt directly, Capital One also collects interest and late fees.

Protecting Profits

In short, Capital One makes less money from BNPL than from direct credit card purchases. By barring its credit cards from funding BNPL transactions, Capital One is protecting profits.