Transaction costs suck up to $50 billion a year out of the economy. But they could be on their way out. Here's why.
Small businesses are about to get their own voice in an Occupy Wall Street-style revolution against credit card interchange rates. And they won't even need to bring a tent.
Interchange isn't exactly at the top of most consumers' minds. But it sure is top-of-mind for small businesses owners. The second a card gets swiped, a seller knows that they're kissing up to 10 percent of their sales-price goodbye. It's a cost of doing business that's so ingrained into our economy that most small businesses just grin and bear it. Small businesses either eat the costs of processing a credit card—or pass them on to the consumer. Either way, it's friction that sucks money out of the economy to the tune of $50 billion a year.
What if I said that a shift was just around the corner that would force this interchange rate to zero? Sounds crazy, right? But think about other awesomely crazy questions that ended up coming to fruition, like, "Can we put a man on the moon?" or "Will Burt Reynolds ever shave his mustache?" Both happened. 'Nuff said.
"Can we put a man on the moon?" or "Will Burt Reynolds ever shave his mustache?" Both happened. 'Nuff said.
Over the last 30 years interchange rates have only risen. So what's this shift that causes them to drop? This shift is that we're moments away from stopping thinking about money as paper or plastic (or even phones), and starting to think of it as information. Before Al Gore, um, invented the Internet, we never imagined information would flow so freely. But as soon as the friction was removed from information-transfer, a new economy emerged that totally changed the way we do business.
The same shift will happen when we consider money to be just another medium of information. And it will fundamentally change the way banks and credit card companies do business.
There are two elements driving this transition to interchange zero: 1) Technology driving fees down and 2) Information driving revenue up. Here's a breakdown.
Costs Go Down (due to technology): There are literally hundreds of companies working on next-gen payment methods that are faster, lighter and more secure. Many of these new methods are compelling and shiny to consumers (ready to pay with your phone and leave your wallet at home?) but the really fascinating part of the shift is that these new methods are more efficient and less expensive for businesses. When businesses begin to adopt a technology that costs less than credit cards, the banks will need to shift to become more competitive. This is a good thing because it not only drives innovation in the payments sector, but also saves small businesses money.
Revenue Goes Up (due to information): We all know that information's as good as gold, but when money is information, then every transaction becomes a treasure trove of customer insight. As money digitizes, small businesses will get to know their customers better. They'll be able to leverage this data to make more money off each customer and each transaction. Open at the right times, expand to the right locations, stock the right goods. And that's just the beginning. Seeds of game dynamics (or strategies from the playbook of games) are starting to make it into the transactional space to accelerate the usage of this newfound information. Things like "smart" loyalty cards and daily deals to incentivize customers to come (or come back).
The payment ecosystem is in an unparalleled position to combine mechanics such as these with the information in each transaction. In doing so, they have a unique opportunity to do more than just process payments, but actually help small businesses thrive.
The shift to interchange zero is a technological certainty and the existing players have a unique opportunity to lead the charge, rather than react as it happens. If they do, then they'll be a shining example to other industries (music, TV, print) on how to handle changing technologies.
If they don't, well, like they always say "shift happens."