Ditching Interchange For A Richer Future



US credit dependency has been built up over several decades for a multitude of reasons: our culture of consumerism that encourages people to buy more goods and services than they can afford, the rising cost of living that has caused many to turn to credit cards to finance their expenses, and finally, the flashy rewards marketed towards consumers, incentivizing them to sign up for cards.

But are these credit dependent habits more harmful than helpful? Maybe in some cases. And certainly for the two thirds of credit card account holders who don’t pay off their balance due each month, racking up debt (source: CFPB’s Credit Card Revolvers). And let’s not forget about merchants paying 2-3% in processing fees per transaction.

Merchants are leaving money on the table, and we mean billions 👀 , if they’re not offering a credit card alternative. We really like this thread by Alex Rampell at a16z that digs into a Target case study of their Red Card. We promise it’s worth the read, but in summary, Target’s Red Card is just an abstraction layer that routes to a customer’s bank account. So when their customers swipe, it actually just triggers an ACH transaction - rewards aside, they’ve just slashed their processing and interchange fees so that they’re only paying a flat ACH fee to TD (the issuing bank). Smart. Taking a snapshot of Target’s revenue from Q1-Q3 of last year, if all sales were made via credit card vs all sales made via direct debit, the company would reap $1.5B in incremental income 🤯. 

So a direct-debit payment alternative seems like a no brainer for merchants, right? Well, we think yes. But will credit card loving consumers really adopt one?

We’ve conducted user research that suggests yes, users will adopt an alternate payment method, contingent on the following:

  1. The incentives are better than the perceived rewards their card offers
  2. They feel the experience is as secure as they perceive cards to be
  3. They are familiar with the experience

Incentives. Did you know 1 point typically equals 1 cent? That’s about 1% for most purchases. We’ve tested 1%, 2%, and 5% discounts off of subscription payments when electing to pay using a bank. We’ve also tested a 10% discount off of just the first purchase. Any guesses on the winner? The big upfront discount: 25% of our sample size elected to choose this option over cards and over Paypal. This is good news for merchants. A one-time incentive means that with each subsequent customer payment, the incentive is recouped. Our thoughts? Why pay the processors, the issuers, and the banks high fees when you can offer your customers a discount to increase conversion.

Security. News flash… It's much easier to steal card numbers than it is to steal accounts when no account or routing numbers are typed in as part of the payment experience. People also seem to have a misconception that disputes or chargebacks will be more difficult when paying via bank. Think: if you pay with your Chase credit card, your Chase debit card, or directly with your Chase bank account, it’s always Chase who is handling the dispute, so the process actually works exactly the same way regardless of payment method. Sometimes a little bit of security education through an information icon (i) can go a long way for consumer adoption.

Familiarity. Plaid has helped here. Most people are familiar with the account linking experience through the proliferation of Venmo and even with the latest rent and bill payment platforms that leverage Plaid’s tech. Even 5 years ago, the common bank linking experience was foreign to many users, creating a barrier to entry that we have in part surpassed.

Okay, so people are willing to make the shift, but what does it take to actually get an ACH process up and running? We won’t lie, a direct bank partnership requires months of due diligence and technical resources to integrate with the bank APIs. That’s why we made Waivr. We did the heavy lifting with our banking partner, Wells Fargo, so that merchants don’t have to and can start transacting via ACH in a few days.

We’re betting on a new wave of payment norms that are better for merchants and consumers alike, and it’s ditching the rules and fees the payment ecosystem’s incumbents have defined for decades.

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