The current economic landscape presents significant consumer challenges, with soaring consumer credit card debt and high delinquency rates. In this environment, merchants must think about convenient and responsible payment options that do not exacerbate financial strain. Younger generations, such as Gen Z and Millenials, are particularly cautious about debt and actively seek alternative payment methods. The prevalence of swipe and interchange fees further underscores the need for more cost-effective payment solutions. This article will explore five trends that we predict will expedite the adoption of Pay by Bank in 2024.
Inflation is still persistent, interest rates are still high, and consumers feel the pain. US consumer credit card debt surpassed $1 trillion in Q2 2023, the highest since 2003. Similarly, the credit card delinquency rate increased to 7.2%, a rate we haven’t seen in more than ten years.
Cash-strapped consumers need convenient payment options that won’t plunge them further into debt, especially for routine expenses like bill payments. This is especially true for younger consumers like Gen Z, who approach debt more cautiously. The percentage of Gen Z that carries credit card debt is much lower than other generations, and about a fifth have opted out of having a single credit card.
This generation of digital natives is searching for better, more responsible payment options—79% tried a new payment method in the last year. Pay by Bank allows merchants to build economically viable strategies around payment options conscientious of financial inclusion, i.e., not leaving debit-conscious consumers living paycheck-to-paycheck behind.
The Unending Problem of Swipe Fees
U.S. merchants paid $126.4 billion in credit card processing fees in 2022, a 20% increase from the previous year. During this year’s holiday spending frenzy alone, CMSPI estimates that U.S. retailers will pay card acceptance fees of over $18.6 billion, enough to pay the ≅450k seasonal workers hired this year an annual wage of over $41,000.
Interchange fees persist in the U.S., not because merchants are content with the state of play but because of the deeply connected relationship between the profitability of incumbent banks and interchange-fee-generated revenue from card-based transactions. According to S&P Global, interchange fees comprised a median of 2.7% of operating revenue at banks with at least $10 billion in assets in Q2 of 2023. Of course, some bank's business models are more dependent on interchange than others; interchange revenue makes up 59.3% of the operating revenue for American Express Co., the bank behind the American Express credit card.
The Fed’s response to increasingly predatory interchange fees on card-based transactions is a cap on costs for processing debit transactions. While the cap represents a step in the right direction, many merchant groups, such as the Merchant Payments Coalition, say it doesn’t go far enough. Debit interchange represents only about 20% of the total interchange fees—the rest is from credit card interchange, which remains unregulated and continues to increase.
With no relief for merchants who process credit cards, alternative payment methods, like Pay with Bank, continue to be adopted. Because Open Banking APIs power Pay by Bank and establish a direct connection between the merchant and the consumer’s bank account, fewer intermediaries are involved, and processing costs are significantly lower.
In 2024, as more businesses tighten their budgets, we expect merchant pushback to swipe fees to increase. Merchants will build strategies to incentivize consumers to use Pay by Bank alternatives such as bonuses, discounts, charitable donations with every transaction, and more. This initial adoption will create a domino effect for users who become comfortable with Pay by Bank and use it to make payments across industries.
Real-Time Payments and FedNow Adoption
Real-Time Payments were introduced in 2017 by private companies owned by the largest banks in the U.S. Adoption of RTP was slow at first due, in part, to the reluctance from small and medium-sized financial institutions leary of the real-time rail.
With ubiquity lacking, RTP didn’t initially garner the traction needed to go mainstream. However, an inflection point was reached in July of 2023 when The Federal Reserve launched Fed Now. The publicly owned alternative to RTP has already proven more attractive to smaller financial institutions, a good sign for an uptick in adoption. Still, the problem of ubiquity and its influence on the consumer experience remains.
Even with the answered questions about ubiquity and interoperability, the release of FedNow and the consumer demand for fast and seamless payment experiences will work hand-in-hand with the momentum for Pay by Bank and Open Banking. The combination of Pay by Bank’s directness and simplicity combined with the immediacy of real-time rails is a win-win for consumers who want convenient access to fast funds—use cases include wallet funding, insurance claims, online gaming, sports betting, and more.
Trustly, one of the largest originators of RTP transactions on The Clearing House’s network is proud to be pioneering these use cases and remains committed to marrying Open Banking powered Pay by Bank with real-time rails.
“By late 2024, hundreds more banks and payments services providers will launch account-to-account (A2A) faster payments capability built on the recently launched FedNow. Merchant sensitivity around card fees acts as an accelerant, and banks will turn to A2A to deliver payments solutions that turn open banking insight into executable action for their customers.” - Forrester, 2024 Payments Predictions
According to McKinsey’s 2023 Global Payments Reports, 2024 will exemplify the transition from ‘The Account Era’ to “The Decoupled Era.” The Account Era (1990s to 2020s) can be defined by the emergence of instant transfers and other luxuries that the presence of mobile and online banking afforded. Technology that dominated this era was built to add convenience to the existing banking infrastructure.
The Decoupled Era, however, will branch away from existing banking infrastructure towards more integrated, decentralized, and value-added services. In this era, payment functionalities and account mechanisms won’t need to be in lockstep, and technologies such as tokenization and Open Banking will take hold.
Open Banking solutions, including Pay by Bank, will excel in The Decoupled Era because of their ability to wrap value around traditional payments while maintaining a simple and modern UX for consumers. Access to bank-grade data via Open Banking APIs allows merchants to couple value-added use cases with payments, streamlining and personalizing the user experience.
At Trustly, we recognize the potential value that Open Banking can provide merchants and consumers during the customer journey—before, during, and after checkout. Our Open Banking suite offers many solutions that enhance account-to-account payments, including account verification via Trustly Connect and identity verification via Trustly ID.
Micropayments, often called microtransactions, are small digital payments made for digital products. Micropayments traditionally have been payments less than $1 and can range anywhere from a few cents to $10. While the concept is gaining popularity, the term has been around since the 1960s, when technology futurist Ted Nelson propositioned the term as a way for consumers to pay for individual copyrights on online content.
So, why will the prospect of micropayments gain traction in 2024? The simple answer is threats to subscription-based revenue models due to inflation and supply chain disruption. With more consumers tightening their monthly budgets, likely, many subscriptions will not make the cut. And, with only 2% of many publisher’s audiences becoming subscribers, any loss has a dramatic impact on revenue. And if publishers continue to create the same quantity of content with fewer subscribers, the opportunity for content to be viewed and/or monetized decreases. All of this, coupled with the fact that failed card payments account for 50% of subscription churn, indicates the need for a shakeup in subscription payments.
Micropayments give modern consumers options to control their media consumption and restore their purchasing power—instead of a monthly subscription fee, they could pay for one article or TV show. We already see these types of payments used on social media platforms like TikTok. Still, Forrester predicts that “offering micropayments as a “pay only when you use” option will offset [the subscription economy’s] lost revenue by enabling on-demand micro consumption, taking the utility of micropayments beyond influencer and social platforms, niche media platforms, and the gig economy.”
However, due to their high processing costs, cards aren’t a viable or sustainable payment option for micropayments. If subscription merchants are going to derive economic value from micropayments, they will need to consider a Pay by Bank option. Open Banking will also be a necessary component of this equation. If consumers are going to adopt micropayments, they won’t be manually inputting account and routing numbers. Open Banking will make connecting the account seamless so that paying for individual pieces of content won’t significantly detract from the consumer experience, making them more likely to use it repeatedly.
For more information on the state of Pay by Bank and Open Banking in 2024, subscribe to our newsletter. If you’re interested in working with Trustly’s Open Banking experts, contact our sales team. Happy Holidays!