How digital payments pressure fees
Business Team Investment Entrepreneur Trading Concept
Going back to the debut of the free Square card reader, the mobile payments market has made fees — or the lack of fees — a major selling point.

This trend goes beyond hardware sales or even the mobile point-of-sale niche. The pricing pressure is felt especially strongly when digital technology has an opportunity to cut costs.

Not all experiments in pricing succeed. But combined, they are creating an overall awareness of how much it costs to handle a payment — and how much fat can be trimmed from that process.

This listicle is compiled from reporting by PaymentsSource writers including John Adams, Kate Fitzgerald, David Heun and Brielle Diskin. Click the links in each item to read more.
wells fargo sign
A woman walks past a Wells Fargo & Co. bank branch in Los Angeles, California, U.S., on Tuesday, July 7, 2015. Wells Fargo & Co. is scheduled to report quarterly earnings on July 14. Photographer: Patrick T. Fallon/Bloomberg
Wells Fargo abandons its past pricing
The simplified pricing of fintechs like Square and Stripe has finally caught up with banks' more complex fees, prompting Wells Fargo to restructure its billing for small businesses. Other banks will also face consequences—particularly community banks that depend heavily on local merchants for income.

For years, Square, Stripe, Braintree and other startups that process payments for small businesses have worn their fees on their sleeve, almost like a marketing pitch by FAQ, or at least a branding strategy based on simplicity and transparency.

Wells Fargo this month changed its fee structure for small businesses, or those that process less than $100,000 per year, to 2.6% plus 15 cents for a tap, dip or swipe card payment; or 3.45% plus 15 cents for a keyed-in transaction. For a large bank like Wells Fargo, it's a relatively minor adjustment—and most large banks don't get a huge chunk of their business from providing payment processing to small business clients. But most small banks rely on small businesses for their survival, and any pressure on their fee income is a threat.

"The banks that are the most vulnerable are community banks that get more than half of their income from the smaller merchants, and most of these banks don't have an acquiring solution," said Richard Crone, a payments consultant.

Wells Fargo's "percentage plus cents" fee more closely matches those from fintech merchant acquirers, deviating from the banks' typical table-based fee structure that can vary from one merchant to another.

"Square, PayPal, Braintree and Stripe are redefining the market," Crone said. The fintechs use algorithms to bundle costs, a system that improves over time as more data gets fed into the model, he added. "They're using a more simplified approach, hiding all of the complexity behind a bundled pricing model."
A customer uses a JPMorgan Chase & Co. bank ATM location in San Diego, California, U.S., on Wednesday, July 8, 2015. JPMorgan Chase & Co. is scheduled to announce quarterly earnings results on July 14. Photographer: Patrick T. Fallon/Bloomberg
Chase Pay reinvents acquiring
When JPMorgan Chase announced a 10-year contract with Visa in early 2013 to create a customized processing and end-to-end payments platform, it seemed to have little to do with the bank's mobile wallet plans.

But everything that makes Chase Pay possible is built on the foundation of that platform, called ChaseNet, which takes the traditional five-party acquiring system —the consumer, the acquirer, the network, the issuer and the merchant — and trims it down to three. ChaseNet takes over the role of three of these participants, functioning as the acquirer, the network and the issuer.

In this way, ChaseNet also trims cost, allowing merchants to pay lower fees to accept payments from Chase cardholders.
Square POS app
The Square Inc. Point of Sale application is seen in the App Store on an Apple Inc. iPhone in Washington, D.C., U.S., on Friday, Feb. 16, 2018. Square Inc. is expected to release earnings figures on February 27. Photographer: Andrew Harrer/Bloomberg
Square attempts one-size-fits-all pricing
Back in 2012, Square began offering flat-fee processing to small merchants, furthering the company's efforts to present itself as a more full-featured option for card acceptance.

This came barely a week after Square Inc. stole the spotlight by securing a $25 million investment from coffee giant Starbucks, which also agreed to use Square's software and its processing services.

Square's new rate was 0% per transaction if merchants pay $275 a month. There were limits — no single transaction can exceed $400, and merchants are capped at $250,000 in transactions per year. Merchants still had the option of paying 2.75% per swipe with no monthly fee.

Unfortunately for Square, both its flat-fee model and its Starbucks pact didn't last. The flat fee went away in early 2013, and by the end of 2015 Starbucks chose JPMorgan Chase to handle its processing instead.
LevelUp's Interchange Zero strategy
The mobile payments and loyalty provider LevelUp has repeatedly tested ways to reduce processing costs for its merchant clients, with mixed results.

Like Square, LevelUp expected merchants would prefer an alternative to per-transaction fees, so it debuted Interchange Zero in July 2012. Under that model, merchants do not pay a fee for each payment but they pay a 40% fee when new customers redeem onboarding offers and when repeat customers redeem rewards.

But many clients told the company they would prefer to pay LevelUp's previous 2% transaction fee. Based that feedback, LevelUp brought back its 2% fee model in June 2013 — but it still had ideas for how to attack traditional interchange…
debit card swipe
Cropped view of a credit card reader and credit card against a plain background. Horizontal shot.
LevelUp tries again with debit-pricing deals
In 2014, LevelUp began a campaign to urge users of its mobile wallet to fund payments from a debit card instead of a credit card. The end goal was to get its transaction fees as low as possible, while filling a void left by merchants who switched away from Interchange Zero.

This was as much a play to reduce LevelUp's own costs as it was to reduce its pricing for merchants. LevelUp paid 2.5% to 5% for credit card transactions, whereas debit card transactions cost it 1.5% to 2%. For both credit and debit card payments, it charged merchants 2%.

To this end, LevelUp began sending emails to consumers alerting them to how much money they earned back in rewards for their credit card payments and promising bigger rewards by using a debit card for LevelUp payments instead.
Amazon Go glassgate turnstiles
An Inc. employee scans in to shop at the Amazon Go store in Seattle, Washington, U.S., on Wednesday, Jan. 17, 2018. After more than a year of testing with an employee-only focus group, Amazon Go opens to the public Monday in downtown Seattle, putting to the test the online retailer's technology that lets shoppers grab what they want and leave without paying a cashier. Photographer: Mike Kane/Bloomberg
Amazon cuts its own costs
On the surface, Amazon's loyalty cashback program, Amazon Prime Reload, appears to be just another benefit of enrollment in Amazon Prime, the $99 annual membership program that provides discounts and access to a range of goods and services.

However, a deeper dive into the workings of the program — which offers 2% cash back when shoppers use a debit card or bank account to load an Amazon stored-value account — should give the card payments industry serious cause for concern.

Since its launch in 2005, Amazon Prime has become the hub of the online retailer’s customer acquisition strategy. To continue growing, Amazon Prime needs to broaden its appeal to a wider audience, and its January 2017 move to offer better rewards to Amazon-branded credit cardholders doesn't come close to accomplishing this.

Newer programs like Amazon Cash, a service that allows cash loading to an Amazon account at participating retailers, have set the stage for the debit and ACH-focused Amazon Prime Reload. Both of those programs cater to consumers who prefer cash and debit over credit. This strategy extends to mobile payments through Amazon's growing retail presence. Its cashierless Amazon Go stores, for example, require people to have an Amazon account to enter and shop.

Exploring the inner workings of Amazon Prime Reload provides some revelations on Amazon’s plans for the service, which debuted in mid-2017.

After enrolling a debit card and bank account (Amazon chooses which to use when processing reloads), the next step in the process is to load value to the shopper's Amazon Balance with a $100 load set as the default and emphasized in bold. The 2% cash back is not provided at the time of purchase, but at the time of reload.

Amazon is subtly guiding the end user to load at least $100 to the account and to burn through this to earn rewards. Through this model, card networks and issuers not only lose revenue and brand recognition, but also lose transparency on consumer transaction behavior, shifting the balance of power in terms of customer data analytics back to Amazon.