Retailers Use Payment Apps to Avoid $90 Billion in Swipe Fees

Merchants hope to duplicate the wins of Starbucks and Walmart.

December 13, 2018

ALEXANDRIA, Va. – In 2018, credit-card companies will levy more than $90 billion in swipe fees on retailers. Some believe a solution lies in the acceptance of retailers’ own payment apps, according to Bloomberg.

For years, shoppers have shunned mobile payments offered by third-party providers, such as Apple, but now retailers are encouraging them to embrace the technology by tempting them with discounts and perks. Several chains, including Walmart, Starbucks and Kohl’s, have had some success by baking payment apps into their loyalty programs, and more than half of companies surveyed recently by the National Retail Federation say they’ve implemented “branded digital wallets” or are considering it.

Besides cutting out credit-card companies, these in-house payment systems allow retailers to gather more data on their customers. “In the past, payments were viewed as a necessary evil and a cost of doing business,” says Beth Costa, a partner in Oliver Wyman’s payments and retail banking consulting practice. “Today, merchants and retailers are seeing payments as a strategic lever.”

For decades, retailers have been charged a fee every time a consumer uses a card to make a purchase. The core fee is set by Visa and Mastercard and ultimately shared by those networks, the merchant’s payment processor and the bank that issued the consumer’s card.

But now, retailers are increasingly bypassing Visa and Mastercard by tapping into the Automated Clearing House network, which was set up by U.S. banks more than four decades ago to replace checks and send money electronically between bank accounts nationwide. Consumers and businesses now send nearly $50 trillion each year over the network, compared with the roughly $15 trillion sent over Visa’s and Mastercard’s networks.

Cumberland Farms is an example of this approach. Drivers who fill up at one of the chain’s gas stations can save 10 cents a gallon if they sign up for its SmartPay app, which connects directly to their bank account and is much like paying utility bills or rent. Cumberland Farms says users have saved more than $100 million by using the SmartPay app.

More retailers are looking to take advantage of the lower-cost ACH network, according to Adam Frisch, CEO of Buy It Mobility Networks (BIM), a startup that helps retailers access the network for their loyalty programs and counts Shell Oil Co. and Phillips 66 as customers. BIM can help retailers lower their payment acceptance costs by as much as 95%, and those savings can be used to fund customer rewards.

Some retailers that still use Visa and Mastercard’s networks have found ways to minimize swipe fees. Starbucks’s mobile app encourages users to load funds onto a prepaid gift card, which means Starbucks only pays swipe fees when users send funds to the card, not each time they buy a cup of coffee. The payment app now represents 14% of the coffee chain’s transactions.

The big question is whether consumers will embrace mobile payment apps. Visa has said that less than 1% of the payments on its network utilize the tap-and-go technology used by the likes of Apple Pay. For most shoppers, it’s just easier to whip out the plastic rather than dig through a mobile wallet for a store’s app. 

Much depends on what perks retailers offer customers for signing up. People who use the Starbucks app can skip lengthy lines and earn rewards, such as free refills, birthday offers and early access to special menu items. The Walmart Pay app includes savings tools and makes returns an easier process for the customer. The company says it’s signing up “hundreds of thousands” of customers each month.