On 10 September, global payments advisory firm CMSPI will release the inaugural State of the Industry Report (SOIR) in partnership with merchant payments experts from Sony, lululemon, iHerb, Kroger, Shell, Target, McDonald’s, Best Buy, Walmart, Amazon, and Columbia Sportswear. The report spans 20 countries, covering topics from tokenization to instant payments. We sat down with Callum Godwin, Chief Economist at CMSPI, to see what readers can expect from the inaugural edition.
I wish more people knew about the fundamental economics of the payments industry. Given the economies of scale and the technological barriers to entry involved, it isn’t particularly well-balanced, and it naturally tends towards being highly concentrated. Merchants are going to struggle in that environment because most businesses – even really big ones – only employ a handful of payments professionals, at most. Those teams are coming up in negotiations against companies with hundreds or thousands of payments professionals. As a result, we see strikingly high fees and profit margins from some companies in payments. Our report notes that the two largest card networks had operating profit margins of 60% in 2023, compared to an average of 3.09% for general retailers in the US1.
There are some things pretty much all merchants know about payments. They are aware that card fees are very high, that they have limited negotiation power, and that the industry is extremely complex. The challenge is how to make the best of that situation. A lot of the time, merchants get their information from the supply chain itself – and a lot of it is really good. Generally speaking, however, there’s not a lot out there that merchants – large or small – can use in terms of resources to help them understand the industry from a merchant perspective. That’s what led to the SOIR.
Around a year ago, we set up the Insights Advisory Council (IAC), which is a group of 11 merchant payments leaders from our global client base. We have a great mix of members – domestic and multinational, established voices and up-and-coming professionals, covering sectors from petroleum to apparel.
We started the group because we wanted feedback from our clients on what to research, what products to develop, and really to ‘help us help them’. But when we were discussing their challenges, one message came through loud and clear: lots of our members feel like they are payments experts, but that the average employee in a merchant organisation is not. They feel like they could all sit in a room and agree on industry challenges, but that they were difficult to translate to their wider global companies.
Out of that, the SOIR was born. It's an idea we've had in our heads for a long time now, but it was only when the IAC came together that we were able to bring it to fruition. The IAC members helped at every stage – from structuring the document, to strategically prioritising topics, to pointing out typos. Their input has been invaluable.
One thing I’m always surprised by is the extent to which payments-related costs for merchants have increased in recent years. You might intuitively expect costs to go down as we shift towards an electronic payment system with very low variable costs – and as economies of scale develop, and we get more experienced with dealing with issues like payments fraud. You’d assume those developments would filter through to merchants, and ultimately consumers, in the form of more competitive pricing. However, we found that US merchants paid an estimated USD 224 billion to accept card payments in 2023. If 2023’s transactions had been made in 2009 – across all payment methods –, we estimate that they would have cost USD 49 billion less for businesses to accept.
In Section 5 of the report, we study payments industry regulation around the world. As an economist, it’s a great time to be doing that analysis because we’re now more than 20 years on from the first major regulatory intervention in Australia in 2003. Most people would look at all the money flying around in an industry like payments and assume it was a natural candidate for regulation. It’s interesting, though, that regulators can’t seem to agree on the solution to rising costs, so we now have a dataset of over 300 different interventions to analyse globally. Our report lays that out in a way that nobody has before, allowing us to start drawing some conclusions.
Firstly, that there is a pretty strong correlation between regulatory intervention and average card fees. The average credit card in Japan, for example, where fee regulation has been lighter touch, costs 2 percentage points more to accept than it does in the EU-12 (for the same payment)2, where interchange fees are capped on many transactions. Then, you have jurisdictions like Australia which have been more proactive, and the difference is striking in terms of outcomes.
We found evidence that while interchange caps can help keep costs low, many policymakers who tried this approach were then faced with rising network fees, making holistic enforcement crucial. We also found that ensuring merchants have access to multiple competing networks for each transaction is good at introducing – or, in instances like the US, preserving – competition, and this has been successfully leveraged in regions where it’s protected. In the US, for example, we estimate that full enablement of network routing choice on debit cards could generate USD 4 billion in annual savings for businesses.
The SOIR is developed with merchant input, to fuel merchant decision-making. But that doesn’t mean it’s only for them. There’s a lot in there for innovators and policymakers who are thinking about how to approach the industry and want to better understand its economics – and for payments partners who want to learn more about what merchants think. Generally speaking, we want everybody to understand a little bit more about payments. If any budding economists want to call up the CMSPI Insights team and geek out about payments, we’re all ears.
The report is free, and it’ll be available from 10 September. CMSPI will be sending out some of the key findings in the run-up to its release, so watch out for those. If you want to sign up to receive the report a day early, then you can do that on the CMSPI website.
1. CMSPI, State of the Industry Report. CMSPI analysis of public financial statements.
2. France, Germany, Italy, Poland, Ireland, Greece, Lithuania, Netherlands, Sweden, Czechia, Portugal, and Denmark.
Callum Godwin, Chief Economist for CMSPI, leads a team of accomplished economists whose roles are pivotal in maintaining CMSPI's cutting-edge position in the payments landscape. The Insights team, under Callum's guidance, spearheads CMSPI's merchant advocacy and provides strategic consulting services on a global scale. Callum is recognised as a subject matter expert in various domains, including payments regulation and litigation, the future of payments, payments competition, and card co-badging/routing.
As the world’s leading payments advisory, CMSPI partners with hundreds of Global 500 merchants to save them millions every year. Leveraging the combination of specialist expertise and the CMSPI Platform, CMSPI helps merchants harness the power of data to maximise payments supply chain performance and increase the profitability of every transaction. CMSPI delivers Smarter Payments Intelligence that keeps merchants ahead of the curve.
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