The Future of Payments Revenue is Data
I remember even just a few years ago I would need a healthy stack of cash whenever I went to the pop-up markets in Union Square, or the holiday village in Bryant Park. Now however, the ubiquity of Square or Clover means that it’s strange to have a vendor who only accepts cash. In fact, this past Friday I took off work to wander the streets and every single vendor in Union Square had a card reader of some sort. And it’s really no surprise that card processing solutions have taken off like wildfire in the past decade — consumers as a whole have increased spend-per-transaction for card ($57 vs $22 in cash), and having card processing capabilities is pure table stakes for being a merchant now.
Square and its competitors are simplifying the payments experience and are acting as a merchant services provider. They allow vendors and small businesses to refocus their efforts on creating competitive advantages instead of administrative tasks like processing payments. I know I sound like a broken record at this point, but administration of small business is going to be a point of parity across most companies that sit outside the Fortune 500. As I’ve stated in a previous post, buying services like Square or Clover allow these small businesses to focus on creating better products and experiences for their end users.
Card Processing Fees are High, but Have Fallen Steadily
Take a look at the charts on the right — they denote how much money is taken per credit card transaction. On the top chart, it tells us how much of the transaction the payment processor is getting. This amount is split between the card association (Visa, Mastercard, Discover, AmEx) and the issuing bank (Chase, Citi, AmEx, Discover, etc). There’s also the payment processing fee that gets charged by the merchant solutions provider (the chart below).
Just across these two fees, it’s quick to see that it can cost a merchant up to 5% to swipe a card to make a sale. The good news (for merchants), is that the Fed regulates interchange rates, and thus this rate is falling slowly. If we look at Europe as a signal for where the US interchange market is heading, it may one day it’ll hit 0%.
Not just that, but service costs have steadily fallen in the past few years as well. While not necessarily indicative of the direction of payment processing, other transaction-based revenue platforms have offered no-cost transactions. Take a look at how Vanguard and Robinhood pushed the market to offer 0% commission on trades — there’s no overhead that mandates they have to charge anything, and market pressures have forced that down to 0%. The same holds true for payment processors: they charge a fee because they can and because the market rate allows them to do so. While it won’t be today or tomorrow, it isn’t out of the realm of possibility that payment processing firms will have to re-think their revenue model.
In a World of Big Data, Payment Processors Can Mine Additional Revenue
With falling revenue in the payment processing space due to lowering rates, the payment processing firms have to find additional streams of revenue. As we’ve seen with countless other firms (Google and Facebook for example), amassing user data and selling ads can be incredibly lucrative. As a payments processor with wide reach, this could certainly be partially monetized. However, with the rising privacy environment, the real money however comes from the fact that payment processors know what’s being sold and in what volume.
One of Nielsen's key revenue generators is selling syndicated CPG data on what’s selling and what isn’t. It’s a lucrative arena for payment processors, as they already have the data on file, as well as the existing relationship with the vendors to sell that data. In a world where a price war and a race to the bottom may emerge, payment processing services will have additional revenue streams to tap. With decreased cost to the end merchant, the true winner will once again be the end consumer.
