As many merchants are aware, at 2-4% of each transaction, payment processing fees in the US are the highest in the world. This hidden business expense is so high that, according to the National Retail Federation, it is the most expensive operating cost for retailers after labour, at more than USD 160 billion annually.
In parallel with persistently high inflation rates, economic volatility, increasing cost of acquisition, and margin pressure for US ecommerce companies, conditions are seemingly ripe for alternative payment options to take off. However, this has not been the case until now, for several reasons.
In the US, credit cards are deeply embedded in the financial culture in a way they are not in other countries, through things such as the necessity for consumers to develop a credit score – and bias towards consumption rather than saving.
Wallets and Buy Now, Pay Later (BNPL) have significantly increased in popularity in recent years, but the fact that they are built on card infrastructure makes them needlessly expensive. And, unlike the European Union or the UK, there is little legislative appetite either to mandate lower payment processing fees or to kick-start Open Banking and account-to-account (A2A) payments.
While US merchants suffer from excessive fees, other markets around the world have seen rapid adoption of a range of new, low-cost payment methods that are independent of card networks and free of legacy fee structures, including Open Banking-powered payments in the UK and the EU, Pix in Brazil, and UPI in India.
As the world’s second-biggest ecommerce market, and with the highest fees, the US also has the biggest opportunity for reduced merchant fees. Given the high market opportunity, it should be only a matter of time before alternative payment methods come into play, despite the cultural and legislative reasons that may have stopped progress so far.
So, what would a compelling alternative to card-based payments – and their associated processing fees – look like in the US?
A new, low-cost payment system in the US would need to be built on an infrastructure that removes cards from the equation and puts a focus on lowering costs – and the fee structure would need to be closely aligned with merchants’ interests.
Link Money has already launched such a solution. With Link Money – Pay by Bank, we have built a payment method based on Open Banking technology that utilises bank-based payment rails, removing the need to pay high credit card fees. We can process transactions an average of 70% lower than cards, giving merchants the opportunity to save billions of dollars per year in processing fees. Incumbents have little motivation to undercut themselves to provide these savings to merchants.
While Pay by Bank primarily utilises ACH payment rails, it offers a superior customer experience and a higher payment authorisation rate than ACH Direct Debit. This is because customers authenticate in their bank app or web environment, and without having to manually introduce their card details or their account and routing numbers. In fact, for repeat users, a transaction can be authorised with biometric authentication, which makes the process easier than with credit cards.
Figures for involuntary churn for subscription merchants vary – 1.4% by some estimates, up to 48% of all customer churn for subscription businesses according to others. By contrast, direct debit payments have a subscription failure rate of only 0.5% – significantly lower than cards.
With Pay by Bank, merchants benefit in two game-changing ways – lower processing fees and lower involuntary churn. At the same time, merchants’ costs are lowered in ancillary ways. Since they remove card networks from their payment infrastructure, merchants won’t have to pay for services such as account updaters or tokenization. Additionally, since bank authentication tends to be stronger than cards, the risk of fraud is considerably diminished, which could help merchants increase their conversion rates and their revenues.
Ultimately, innovations such as Pay by Bank have the potential to drive down the cost of payments for US merchants at scale, as Pay by Bank becomes more widely adopted, and incumbents are forced to respond.
This type of innovation drives three key positive outcomes:
Merchants win from lower operating costs.
Consumers win from lower prices, as the cost of doing business is permanently lowered for merchants online and savings can be passed on.
The US economy wins through more spending power for consumers and more efficient use of capital.
If you are a global merchant that operates in the US, you already benefit from lower processing fees in other markets. Thus, you should be aware of the impact that low-cost payments can have on your financial situation, particularly at scale.
At a time of excessive fees, inflation, economic uncertainty, and increased cost of acquisition, Pay by Bank is a compelling option to offer at the checkout alongside your existing payment options. With the seamless integration and robust customer service, the process can be completed quickly so your business can start saving immediately.
This editorial piece was first published in the Payment Methods Report 2023, which provides an in-depth overview of the latest worldwide developments in how people pay, the payment methods space, the innovative technologies that these methods work upon, and the best strategies on how to win at conversion and retention.
Shaun Vanderkaap is the VP of Sales and Marketing at Link Money. Previously, Shaun worked at Adyen, expanding the merchant base and growing new regions and products. With 12 years of combined experience working in the payments industry across international markets, Shaun is an experienced payments professional.
Link Money built simple Open Banking A2A payments for the US. Our proprietary model makes decisioning easy and even protects merchants from some ACH return codes. Merchants can save on payment processing, reduce fraud, and create a seamless, safe, and sticky experience for their customers without worrying about screen scraping.
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