Organizations are constantly in search of new ways to optimize their banking relationships and reduce costs. Still, many companies face a significant hurdle: the lack of time, resources, and expertise needed to understand the intricacies of data elements like AFP Service Codes™, ensure their correct mapping and harness the valuable data within their bank fee statements. This oversight can lead to inaccurate benchmarking, improper cost calculations, and missed opportunities for cost savings.

The AFP Service Code™ Conundrum

AFP (Association for Financial Professionals) Service Codes are a critical component of any bank fee benchmark, reporting, analysis, or project. Additionally, they are also the key that unlocks the mystery of the service charges themselves, as they provide a standardized way to categorize transactions and banking activities. The challenge arises when organizations, especially the financial institutions who report them, fail to allocate the necessary resources to properly manage these codes.

The improper mapping of AFP codes can result in flawed benchmarking, making it difficult to accurately compare financial performance with industry peers. Banks are one of the largest consumers of benchmarking data and they perform more cross-bank pricing exercises than their corporate clients so the lack of attention to these codes creates more work on all sides.

In addition, within the loads of data contained in bank fee statements lies a wealth of cost-saving opportunities that often go unnoticed. The complexity of these statements and the sheer volume of transactions can overwhelm finance teams, leaving them without the time or know-how to extract meaningful insights that can positively impact an organization’s bottom line.

The Solution For Data Complexities

While extracting meaningful insights from banking data presents universal challenges, there are a few solutions organizations can consider:

1. Transition to Electronic Bank Fee Data – Traditionally, treasury departments spend exorbitant amounts of time sifting through PDF statements. Making the switch to electronic data not only saves time, but also makes the AFP code mapping process much easier to complete with potentially fewer inaccuracies.
2. Work with AFP Accredited Service Code Providers – These banks have their AFP Service Codes certified annually to ensure accuracy and consistency.
3. Leverage Bank Fee Software – Bank fee analysis software is a helpful tool that can identify the hidden potential within your bank fee statements. A solution that manages the data classification is key to being able to gain visibility into the nature of your charges to reduce costs and detect internal processing issues that should be resolved.
4. Outsource Your Benchmarking – Utilizing data service providers to offload the benchmarking process allows organizations to access comprehensive data sets, tap into external expertise, unlock accurate industry comparisons, identify areas for improvement, and make data-driven decisions with confidence.

Why Redbridge

With our comprehensive bank fee analysis software and team of experts, we offer clients:

• Strengthened Bank Relationships: Proper AFP code analysis and mapping, as well as data optimization, lead to more transparent and efficient communication with your banking partners. This strengthens your relationships and fosters collaboration for mutual benefit.
• Time, Money, and Resource Savings: Redbridge’s finance expertise and proprietary technology streamline the entire data process, saving your organization precious time and money so that you no longer need to allocate excessive resources to manual data analysis.
• Better Benchmarking: Our global database includes billions of fees in more than 105 countries and 550 bank branches.
• Enhanced Finance Team Efficiency: With Redbridge as your partner, your finance team becomes more effective and efficient. Freed from the burden of manual data analysis, they can focus on strategic initiatives that drive growth and profitability.

If your treasury department’s current process for streamlining the analysis of its bank fee data is unoptimized, it’s crucial that an efficient strategy is devised and implemented. Working with a data optimization partner like Redbridge allows organizations to free their internal resources by outsourcing the heavy lifting of data analysis and benchmarking to finance experts.

Connect with us today to learn more about how you can optimize your bank fee analysis process and enhance your cost-savings capabilities.

– What does all this mean for corporate financing strategies?

– When it comes to bank financing, companies looking to strengthen their financial structure should not waste time as the tightening of market conditions has only just begun. For companies seeking to refinance existing debt, carrying out an amend & extend will enable them to keep their current financial terms and conditions in place. That means they can postpone discussions with lenders until the environment normalizes.

Companies should also consider alternative sources of liquidity. The high yield market has seen some recent windows of opportunity but could remain volatile given uncertainties about inflation and recession. It is important to prepare in advance in order to be ready when the timing is right by working on your credit ratings.

Unfortunately, this market is not accessible to all borrowers. Meanwhile, factoring has been growing for a wide range of companies, from smaller to large corporations. The price of factoring has increased less than it has for other types of financing and it’s open to borrowers whose credit profile has suffered as a result of the current economic climate. Factoring also has the advantage of being less capital-intensive for banks.

With economic conditions becoming more difficult, there’s been an increase in direct lending, sponsor transactions and special situations funds. This has been particularly noticeable in the energy sector in the US, which is facing the withdrawal of European banks and institutional investors due to environmental concerns. US banks are also reducing their exposure to borrowers in this sector that don’t have a convincing ESG policy.

I’d sum it up by saying it’s vital for companies not to postpone their opportunities for raising debt – if they wait, they risk seeing the window of opportunity close.

– How important is ESG?

– ESG has a big role to play in facilitating negotiations and access to liquidity by broadening the base of potential lenders. What’s more, companies perceived to have a strong commitment to sustainability can obtain improved terms and conditions.

ESG financing accounts for more than half of the financing arranged by Redbridge. When arranging this kind of financing, it’s vital to ensure that the ESG indicators chosen are in line with the company’s strategy and that the market deems them relevant. The financial implications of the ESG objectives not being achieved must also be defined and negotiated in advance.

We recently surveyed over 30 banks in the US, including large national banks, large regional banks and smaller local banks. ESG was of high importance to 38% and developing importance to 24%. Almost all banks see it continuing to grow in importance over the next few years. The current focus is starting with higher emission sectors such as oil and gas, construction and automotive, but will be extended over time. As with most things these days, ESG is influenced by political considerations, causing conflicting incentives for the banks.

– Why should companies choose to work with Redbridge?

– We raise over €10 billion per year. We close between 35 and 40 engagements every year, three-quarters of which are financing transactions, with the remainder being advisory engagements on debt structure and credit profile positioning. This means we have a great deal of insight into what’s going on in the market.

Calling on our services means you gain access to our in-depth knowledge of market conditions and the capacity of each lender to mobilize at a given moment. We can let you know which banks haven’t raised their prices too much and haven’t used up their loan envelopes. We’ll also provide you with information on the conditions that the best bidders in the market are offering:

• Which terms can be negotiated to provide flexibility without changing the price
• Which additional sources of liquidity would simplify negotiations with your existing lenders
• Which ESG KPIs will give credibility to your company’s approach to CSR

Our team can provide objective advice on all these subjects based on the experience we’ve built up working on a wide range of deals. We help companies with all kinds of credit, financing and liquidity issues. We’re currently working on a lot of rating and risk-adjusted return on capital/banking relationship consulting projects, which is indicative of the concerns companies have about accessing bank liquidity over the near term.

– How do you intend to enhance the advice you provide to companies in 2023?

– We’re expanding our international footprint by continuing our development in Switzerland, Belgium, Italy and France. What’s more, our activity in the US is set to increase even more as we’re continuing to work towards obtaining a broker-dealer license.

Given the difficult macro backdrop, it seems clear that making the right plan will remain important as low probability economic shocks are becoming ever more probable. We are therefore pleased to announce the strengthening of our team with the arrival of a number of experienced former bankers, including Guy Silvestre, Pierre Bonnet, Margaux Randier and Cédric Le Brenn. We now have 17 people in Europe and the US serving both large and mid-cap companies.

We have also launched a major internal project to structure our market intelligence and digitalize it with the aim of developing new technological solutions that best meet our clients’ needs.

Last autumn, the ECB announced its decision to delay the Euro system’s migration to the new ISO 20022 messaging standard by four months to ensure that the transition to the new platform will be smooth. In light of this announcement, Swift committed to further analyze and validate impacts on the timeline for using ISO 20022 in cross-border payments and reporting (CBPR+).

To ensure that operational and business continuity is maintained across the global financial system, Swift has aligned the start of the global ISO 20022 migration for CBPR+ with the ECB’s updated timetable. As such, the period of coexistence between the ISO 20022 and MT messaging standards for all users will begin on March 20, 2023.

At this date, banks will start to move all of their cross-border payments messages to the ISO 20022 financial messaging standard, whose messages are more highly structured and data-rich than the previous format. The coexistence period between the two standards will end in November 2025, when MT messages will be removed. Banks are free to adopt the new format at their own pace between March 2023 and November 2025. In the meantime, in-flow translation tools will help them to receive messages in the format of their choice.

What are the implications of the the migration to ISO 20022?

At first glance, it might seem like corporates don’t need to worry about the migration to ISO 20022 as they are not involved in the interbank space. What’s more, they already have the choice to send payment messages in MX format or via FileAct for large ISO files.

But that’s not the full picture. The migration does have implications for corporates, as ISO 20022 could improve the efficiency of the interactions between their treasury, accounting, sales and purchasing departments. And the richer data within ISO 20022 messages could also lead to enhanced bank reconciliation, cash forecasting and payment efficiency for corporates.

For banks, the ISO 20022 migration is much more than a compliance issue. It represents an opportunity for them to develop compelling business cases for their clients.

The financial industry is still in the process of identifying all the potential use cases that ISO 20022 messages will lead to by exploiting synergies with real-time payments and modernized payment infrastructures. At SIBOS, Deloitte presented two potential use cases for the new standard during a workshop: one for the insurance industry, the other for small businesses.

Insurance industry use case: better processing of insurance claims

This use case is linked to the processing of an insurance claim, all the way from filing and approving the claim to paying the check and performing account reconciliation. At the present, it generally takes between 5 and 15 days to receive payment after making a claim. What’s more, making entries manually throughout the process might lead to errors, and the overall cost of processing a check is between  $20–$30. This can be reduced by $10 by using the ISO 20022 system as reconciliation is easier and there is no need to issue and post a check.

With ISO 20022 embedded in the app dedicated to claim direct deposits, the customer can follow the approvement process in real time and is notified when the payment is received. For this to be possible, the bank must be able to provide real-time payment APIs to the insurer through the relevant ERP, ensure there are real-time controls on fraud and anti-money laundering, and send real-time acknowledgement messages along with structured remittance data. In this case, ISO 20022 is used on the reconciliation side of the transaction.

Small business use case: installment payments

This use case considered the benefits of linking a web-based ordering platform to ISO capabilities, with a QR code proposing different types of payments based on the remittance information. Banks could generate additional business by providing funding or additional offers to their clients based on the clearer view of their business that ISO 20022 messaging results in.

Corporates need to invest in ISO capabilities so that they can accept required data from their customers as well as achieve increased automation through end-to-end processing and reconciliation of payments. They also need to invest in additional digital capabilities. When combined with ISO 20022, these investments will result in significant benefits for their customers, such as QR-embedded invoicing and the ability to track the progress of their orders online. There will also be benefits for corporates, such as significant cost savings through shifting from manual-intensive to automated reconciliation and optimized treasury operations.

What is payment architecture?

Payment architecture is the carefully designed structure allowing a merchant to accept payments from anyone who is willing to pay or has previously agreed to be debited.

For each merchant, payment architecture may differ slightly depending on their overall goals and what systems are currently available to them. Looking at the payment value chain can give merchants a better idea of what they should be looking for based on their needs in each step of the payment process . The payment value chain is a series of steps that outline the entire payment process from beginning to end. It takes into account both “card present” and “card not present” transactions.

The Payment Value Chain

Today’s payment ecosystem is very fast-paced and operates in an environment where many different types of payment methods coexist. Some of them with international reach (e.g., Visa, Mastercard, American Express, UnionPay…), and others with a very local approach (e.g., iDeal in the Netherlands).

At the same time, payment providers face extensive regulatory requirements and ongoing evolution, which makes it extremely difficult for them to have global reach and accept all available payments methods at an optimized cost. Therefore, there is currently no single provider that can cover all merchants’ needs in every country or region at the most competitive price.

As a result, merchants must decide whether to pick specialized providers or go with one that offers full-service, then fill the gaps with complementary solutions. As usual when talking about technology, each approach has its pros and cons:

The key takeaway is that there is no “one size fits all” solution when it comes to payment system design. Rather, there is a myriad of providers that each merchant needs to carefully consider based on their needs.

Why is payment architecture important for merchants?

Deciding on the best payment processing architecture for a given merchant is particularly complex. This is because many different things need to be taken into account including, technological, business, finance, and compliance related implications.

When looking at a business’s top priorities related to payment architecture, there is always a push to have the most relevant payment methods with frictionless user experience. This is the case no matter how risky, complex, or costly these solutions can be.

From a compliance and risk point of view, accepting and collecting payments must be a bulletproof process. Meaning any associated risks need to be identified, properly mitigated, and controlled. One of the important security details to look for is PCI-DSS (Payment Card Industry Data Security Standard). As non-compliance may end up with the unilateral termination of the acquiring contract by the acquirer. Payment related fraud is also another big piece when it comes to payment risks.

When looking at how payments work from a system and process standpoint, the workload must be as low as possible to maximize efficiency. Lowering the workload can be done by relying on pre-built integrations or task automations offered by provider(s). For example, if a provider has a pre-built integration with an ERP or ecommerce platform already used by the merchant, the implementation will go much faster. Once a provider is selected, putting enough effort into the payment integration design will drastically reduce delays in the implementation process.

Different types of payment architecture

The best way for merchants to set up an efficient payment architecture

Setting up an efficient payment architecture starts with clearly identifying the merchant’s requirements and making sure nothing important is overlooked. An effective approach to this would be to tackle the main topics one by one and then weight and prioritize each to establish a consensus across different departments.
This 360º approach should include the following topics:

1. Acceptance & customer experience
2. Security, fraud management & compliance
3. Technical architecture & internal organization
4. Cost analysis and potential optimizations
5. Provider’s relationship and selection

Once a list of requirements and their level of importance is defined, the exploration of possibilities and further assessment can start. Some of the main considerations a merchant will typically need to think about when defining the target payment system architecture are the following (list non exhaustive):

Multichannel vs omnichannel

When merchants have multiple sales channels, combining all of them in order to create an omnichannel experience may be a key objective. Combining them will determine if there is still a need to rely on omnichannel providers or if the setup can be done internally. Building it internally will allow for more flexibility but, require a more complex implementation (including how to remain PCI-DSS compliant).

One main payment provider vs multiple providers

There are any many pros to using one provider, such as aggregating volumes for better pricing or being able to simplify implementation and management. On the other hand, having distributed systems architecture also presents many benefits. These include flexibility to select providers better suited for the job or that are the least costly. A distributed architecture also helps reduce the risk associated with a provider going down, as the traffic can always be routed to another provider.

Full acquiring service vs payment gateway + local and / or international acquirers (banking or non-banking acquirers)

Full-service providers usually have a wide offering of payment methods and a centralized platform because their acquiring rails are either in-house or they rely on their own acquiring partners. However, this setup can significantly limit the options to optimize costs. On the other hand, a gateway + acquirers’ setup usually offers less payment methods and is more complex to implement/maintain, but let’s merchants negotiate and pick acquirers for fully optimized costs.

Terminal management

Traditionally, terminals were purchased directly by constructors, but now it is a common practice for terminals to either be rented or sold by payment providers with maintenance fees. However, because of this vertical integration, some payment providers limit terminal usage to their own acquiring services. Doing so increases the risk of vendor lock-in and limits the options for a merchant to optimize costs on specific payment methods. Methods such as American Express or services such as Dynamic Currency Conversion (DCC).

Payment orchestration layers

This payment platform has been a hot trend for a few years, and it’s currently only available on Card Not Present (CNP) transactions – Mail Order, Telephone Order (MOTO) and online transactions. It has a multi payment provider strategy while simplifying a lot of the technical implementation and maintenance. In fact, a payment orchestration layer becomes the single technical point of contact for a merchant, while offering connections to (almost) any payment gateway, payment processors / acquirer and other third parties like 3DS or fraud management providers. Therefore, an orchestration layer can facilitate the way merchants secure transactions while maximizing conversion by proposing a better payment experience.

Specialists

Depending on a merchant’s business and needs, it can also be worth looking into specialists for specific services or geographies. Specialists may offer a better level of service and/or better pricing conditions:

• payment service providers specialized on local and alternative payment methods
• token management
• fraud and/or chargebacks management
• dynamic currency conversion (DCC), VAT refund, maintainers

Corporates are increasingly demanding instant treasury solutions with improved analytics and high straight-through-processing ratios. According to surveys conducted by Strategic Treasurer and Tink, treasurers’ top two priorities today are improving the accuracy of cash forecasting and increasing automation of the workflow for API-enabled services. In fact, 40% of treasurers would like real-time / intra-day visibility on their cash positions. Meanwhile, financial institutions’ positive stance towards open banking has increased fourfold.

Eddy Jacqmotte, group treasury manager at Austrian chemical company Borealis AG, sums up why the concept of instant treasury is so important. “We have implemented an API solution with our US bank that flows directly into our ERP system, with a matching program, and basically 90% of our payments are immediately matched. With APIs, corporates are able to change their way of working. We’re moving from a situation where only the bank is providing information to an ‘on-demand’ situation, in which treasurers can access information to perform certain tasks whenever they need it”. According to Jacqmotte, interest in APIs goes well beyond the world of treasury. Company management teams are eager to access the most accurate information possible to base their decisions on. “We dove into the world of APIs three years ago. I am now waiting for all my banks to be ready!”, says Jacqmotte.

What is instant treasury?

But what does instant treasury really mean? To answer that question, Nicolas Cailly, head of payments and cash management at Société Générale, explains that “first we need to differentiate ‘instant’ – in seconds – from ‘real-time’ – batch-processed within the hour – and ask ourselves what is the value of instant or real-time, and in which use cases we need them”.

Christian Mnich, head of solution management treasury and working capital management at SAP, concurs. “It’s not enough to get statements at the end of the day – we need to question whether we really need a real-time view of any transaction”, he says. Jacqmotte considers that an update three or four times per day would be sufficient for treasury operations, acknowledging that “A credit department, for which certainty regarding the payment is essential, might have a different point of view”.

How to achieve instant treasury

There are two competing visions among banks about how to achieve this real-time visibility and operability on a global basis, which is needed by companies operating in multiple countries. One proposes building the future on legacy systems, while the other is much more disruptive.

Société Générale’s Cailly judges that “there is no magic wand that will lead to multiple banks agreeing upon one course of action”: achieving real-time visibility requires an overlay of cash concentration services based on the agreements that banks have with one another. As operational activities are based in different countries, the service is going to be different from one bank to another and from one country to another – even within the same bank – because of local regulations. “To address this, the banking industry is looking for global standards, or at least regional standards, such as Swift instant cash reporting solutions. In the absence of such standards, the other possibility is to have a man in the middle, like a software vendor solution, that can aggregate different things and provide treasury departments with a global view and an easy way to operate”, explains Cailly.

Regional differences in instant treasury

The quest for instant treasury is not the same for everyone, and is taking different forms around the world. “If you want to look at real innovation in payments, go to Asia. They’re leading the world and are at least five or six years ahead of Europe and the United States”, according to Victor Penna, global co-head of transaction banking at Mashreq. While cheque payments and lockbox processing are still commonplace in the US, treasury in Asia is heading towards real-time and new-technology-enabled services, following on from the deployment of brand-new real-time payment infrastructures in several countries. “When a firm starts to provide access to real-time payments online using QR codes, it can attract small businesses that don’t need to use a credit card to buy”, says Penna. He cited Singapore as one of the most prominent countries with respect to payment innovations as consumers can pay with the same QR code system using any app developed within the country, as well as with Alipay and WeChat.

No more batches?

“Real-time encourages banks to move away from a batch state of mind and make the transition from legacy infrastructures and processes”, says Lisa Vasic, managing director, transaction banking at ANZ Banking Group. The European market is developing a less disruptive approach than in Asia. Euro Banking Association (EBA) clearing is reportedly planning to accelerate bulk payment procedures to a ‘better than real time’ framework. Instant payments in Europe are designed for cases where absolute certainty about a completed transaction is required before any sale can be concluded. On the other hand, immediacy seems less essential for payments such as salaries and business-to-business invoices. For these, it seems wise to move to settlement in a few minutes.

The EBA has been working on modernizing the bulk payment framework so that it moves towards a continuous gross settlement mode. This settlement mode is linked to each participating bank with pre-funding possibilities via the pan-European Target 2 system, which is operated by the European Central Bank. Alternatively, the bank can wait until it has enough liquidity in its technical account to settle.
The EBA is also seeking to establish service levels that are more harmonized between banks to enable them to offer additional services, such as intra-day reporting.

Instant treasury requires multiple touchpoints

There are already national agreements in place to deliver several settlement cycles within the same day. Finland and Ireland implement an end-settlement function during the night to ensure that payments from bodies such as pension funds or social security systems are in beneficiaries’ accounts by the first hour of the day.

Implementing new settlements requires investments by banks and changes in the way they interact with their customers. The EBA clearing plan to achieve this move from a single settlement to multiple settlements is not mandatory, but is based on consultation between the major European banks.

Leveraging the data

“Talking about the future, there are plenty of opportunities for joint spaces in which we can leverage data as early as possible to unlock new potential. Think about the sales orders that are in ERP systems. If you could share them right at the beginning with your financial partners, that would open up access to new working capital funding”, explains Christian Mnich from SAP. To unlock liquidity from the ERP system, treasurers first need to consolidate and centralize information, then capture bank statements in a single system to get more real-time transparency.

“Corporates need to do their homework if they’re to be able to follow the trend”, concludes Eddy Jacqmotte from Borealis. He also points out that extra resources are required to handle all the connections, such as bank connectivity, ERP, APIs and artificial intelligence tools, to reap the benefits of instant treasury operations.

Banks’ support

The overall situation resumed nicely after the tumultuous covid credit events in the world of commodity trade finance. This is true especially from the perspective of the large traders to whom certain banks have pledged “whatever it takes” type of commitments. The year has brought about peak liquidity requirements first on the metal side, then oil and latest on gas and power whereby substantial additional liquidity was made available in record time from numerous banks and even states.

The large traders’ quest for additional sources of capital seems never-ending. Banks have been accommodating but there are limits. Meanwhile smaller and emerging traders are still struggling to catch banks’ attention and commitment while slowly and diligently building the required track record. There are no quick wins for building trust, just hard work and patience. Everyone anticipates that technical solutions aimed at mitigating, especially fraud risk, and making collateral more secure will help tremendously. And then there is the trade finance gap!

The trade finance gap and alternative liquidity providers

The Asian Development Bank’s global trade finance gap was previously estimated at USD 1.7 trillion. The study confirmed that SMEs involved in trade represent approximately 40% of the rejected trade finance requests. Hopes that direct lenders and trade finance funds can bridge that have been overly optimistic. Such players have hurdles both on finding the flows that will pay the high return requirements demanded by investors and building comfort on the investor side that they are deploying capital towards acceptable risks.

Such “fixed income” investors are not very familiar with trade finance and diligence is required in selling a risk mitigated package of classic trade finance assets (bills of exchange, receivables). For those players that have a good understanding of the risks involved and appetite beyond banks’ often restrictive approach, there is business to be made. What remains to be seen is how the economy will “land” following the unprecedented period of financial tightening we are seeing and impact on trade in general and commodity trade in particular. Furthermore the increased borrowing costs will test traders’ ability to pass it on to suppliers or off-takers in the supply chain. Ultimately there will be a higher bill to pay.

ESG

ESG pushes forward as the new compliance and companies (especially around debt facilities) need to embrace it sooner rather than later. Time is important and action needs to be taken sooner rather than later. Approaches vary a lot with some corporates working towards or having a dedicated rating while others prefer to develop very specific business related KPIs. There will be a forming process and the standard will be further refined but what is critical is that ESG needs to be put in the context of the company’s business model and properly understood by investors and stakeholders. What remains interesting to see is the linkage of syndicated facilities to ESG criteria, while transactional commodity finance lines, which remain the bread and butter of the trade and commodity finance sector seem not aligned.

Fintech

From blockchain to post-trade execution platforms, there are many players on the trade related fin-tech market. The challenge has been to align stakeholders and the risk is to end up with a solution chasing a problem. The return on investment profile and messaging of such solutions needs to be further refined. Legislation will play a critical role and will further enable the digitization of trade and hence bring a contribution to increased transparency and (fraud) risk mitigation. It will all come together, as I believe the digitation of trade is in its infancy. With English law being the main choice for trade and related arbitration, we can only congratulate the UK for the advancements on the Electronic Trade Documents Bill.

Overall, it seems that we are moving from an environment stressed by specific events like supply chain constraints, fraud, absence of physical documents, liquidity requirements to a more overall challenging economic environment with increased operating costs and a new financial regime. Sticking to risk management, disciplined capital allocation and competitive advantages will once more help throughout more difficult times.

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Among those testifying at the hearing, which was held on May 4, 2022, were Laura Karet, CEO of supermarket chain Giant Eagle, Bill Sheedy, a Senior Advisor at Visa, Linda Kirkpatrick, President of North America at MasterCard, Ed Mierzwinksi, Senior Director of the Consumer Program at U.S. PIRG, a consumer advocacy group, Charles Kim, Executive Vice President at Commerce Bancshares, and Doug Kantor, general counsel for the National Association of Convenience Stores.

Opening the hearing, Durbin noted that consumers have paid $794 billion in interchange fees, also known as swipe fees, since the last Senate hearing on the subject in 2006, when the Durbin amendment was passed, which limited retailer fees for debit card processing. Interchange fees, he said, are designed to avoid competitive market pressure. And “they’re a gravy train” for banks and credit card companies. “I strongly support having a disclosure on credit card statements that says how many swipe fees you’ve paid. Consumers don’t know what a swipe fee is, but they would (if there was a disclosure).”

According to Kim, banks and merchants should share in the cost of the system. Banks and credit unions invest billions of dollars into building and securing the payment system. “Merchants contribute by paying a small fee when they use the system to make a sale. That’s interchange,” he said. “Our nation needs to keep up when it comes to technology and security. Interchange fees are an investment in American commerce,” Kim said. This was refuted by Kantor, who noted that “Visa and MasterCard set the terms, which insulates those fees from competitive market pressures to keep them high.” While credit card companies invest some of the revenue in areas like security and fraud protection, they have significant discretion in setting the fees. “We need competition in this market. That’s the bottom line.”

Limit interchange fees

“Other countries limit interchange fees. What lessons can we learn from all of these countries that have decided that interchange fees are too high?” Durbin asked. “Well, those countries know that the credit card system is a market failure,” said Mierzwinksi. “Congress should strengthen the Durbin amendment and expand it to credit cards and lower interchange fees across the board.”

Sen. Chuck Grassley, Republican of Iowa, sought to clarify the relative market power of the major credit card companies. “Do Visa and MasterCard abuse their market power?” he asked. Sheedy responded: “No. Consumers are empowered to shop and merchants benefit.”
Added Kirkpatrick: “The payments system has never been more competitive.” As evidence, she cited the growing number of payment options, including cryptocurrencies, digital wallets and buy now, pay later.

A market system to discipline prices

Kantor countered, “This is not a balancing of the marketplace. There needs to be a market system to discipline prices and we don’t have that here.” Responding to the assertion by the credit card executives that innovation was a key element of interchange fees, he said, “The innovation in technology and payments does not make up for the lack of innovation and the antitrust problem in credit cards.” Karet added, “Every item in our store is individually negotiated. The price is not set unilaterally by the company. MasterCard and Visa are the only vendors we cannot negotiate with. It’s a take it or leave it proposition. I’m not an economist, so I can’t give you the definition of a duopoly, but if it walks like a duck and talks like a duck…”

Sen. Richard Blumenthal, Democrat of Connecticut, asked whether the fees charged by the credit card companies were passed on to consumers. Absolutely responded Kantor. “There’s 100% passthrough in every region of the country, so consumers pay these increases every single day.” Sen. Mike Lee, Republican of Utah, wanted to know if it is anticompetitive for Visa and MasterCard to tell all banks that they’re going to increase interchange fees for merchants. Sheedy said, “Visa sets the interchange fees on its own. We do it with input from the marketplace. The impact of the pandemic on merchants has been important to us. We lowered rates at the beginning of the pandemic. We are not raising rates. The average rate has been flat since 2015.”

The cartel behavior

Sen. Lee continued. “Does it amount to cartel behavior to agree on interchange fees?” he asked. Sheedy responded that “we feel it is highly competitive in that it delivers the same interchange fee to thousands of institutions. We feel the model works very well in a system where you need tens of thousands of institutions.” “For a network effect?” asked Sen. Lee.

“Yes, you need to have a default interchange fee,” Sheedy answered. Sen. Lee wanted to know what would happen to credit card rewards if the system changed. Kim responded that roughly 60% of interchange fees go out in the form of rewards. “And not just to the wealthy. It’s broadly distributed.” “So the banks would still get paid, but get paid less and the rewards programs would be a casualty?” “Yes,” said Kim. Sen. Chris Coons, Democrat of Delaware, noted that the issue isn’t just losing rewards programs, but losing access to credit. “How do issuing banks rely on interchange to offer credit services and what impact would it be if that revenue substantially declined for your bank,” he said.

Said Kim, “I think you’d see smaller banks just go away.” Kantor countered that “we haven’t found the parade of problems around the world that Mr. Kim and his brethren talk about. We haven’t asked for a cap on fee. We think there needs to be competition and market prices.” Sen. Grassley summed up by saying, “There’s a balancing act, and any future action should be carefully considered for (its) possible impact.”

Covid 19 resulted in an increase in online commerce and, for merchants, a significant switch in their card transaction structure from card present to card not present transactions.. However, during the past year, we have observed a slow but steady improvement in volume compared to the challenges we all experienced in 2020 and early to mid-2021. We have identified the major changes made to Visa, MasterCard, Discover and American Express’ rates and fees.

Payment card processing fees are broken down into three categories:

• Interchange
• Assessment
• Fees

Interchange is paid directly to the issuing bank and are associated with a particular interchange category, depending on the criteria of the transaction. Visa and MasterCard publish their interchange rate tables online. American Express does not have interchange per se – they assess ‘discount rates,’ which essentially operate the same way as an interchange fee.

Visa

Visa fees vary based on a wide range of circumstances, such as card type (consumer or commercial), Merchant Category Code (MCC), transaction environment and more.

One of the changes that really stands out is to Visa’s Non-Qualified Consumer Credit interchange, which will increase from 2.70% + $0.10 to 3.15% + $0.10, an increase of 0.45%. Generally, merchant account providers apply Non-Qualified fees because the customer used a commercial card, foreign credit card or certain rewards cards. Additionally, the Non-Qualified rate may be applied to retail merchants that key-enter a transaction or fail to batch out at the end of the business day.

MasterCard

Regarding MasterCard, the highest rate increase we’ve observed is with their Standard interchange, increasing from 2.95% + $0.10 to 3.15% + $0.10, an increase of 0.20%. Standard rates are the highest rates that you can be assessed on a MasterCard transaction. Typically, standard rates are applied when the transaction does not match any of the basic qualifications, including but not limited to missing AVS data (Address Verification Service), not settling sales daily or failing to submit otherwise required data based on your merchant type.

MasterCard Enhanced Standard and World US Standard will also increase from 2.95% + $0.10 to 3.15% + $0.10. Conversely, High Value Standard and World Elite Standard will decrease from 3.25% + $0.10 to 3.15% + $0.10, a decrease of 0.10%.

Discover

Discover is one of the four major credit networks and is unique compared to other card networks. Rather than issuing cards through a third-party bank, Discover issues cards direct to consumers and commercial entities. Their interchange fees are not split between the card network and issuing bank; Discover fills both roles. Discover is therefore paid directly through the merchants credit card processor for each transaction.

The change that really caught our attention is the increase to their Commercial Electronic Prepaid interchange which is increasing from 2.30% + $0.10 to 2.65% + $0.15, an increase of 0.35% +$0.05.

Discover will introduce a new Charity US Consumer Interchange Program, MCC 8398. Both card-present and card-not-present transactions are eligible for this program, and the rates are as follows:

American Express

American Express also issues cards direct to consumers and commercial entities. Unlike Visa or MasterCard, American Express credit card processing is not straightforward. Visa and MasterCard are both open credit card networks, meaning any financial institution can issue these cards. But American Express is a closed network, which gives them much more control over payment card merchant fees.

American Express is introducing a new Debit Card Program, which includes Unregulated and Regulated Consumer and Small Business Debit Products. Unregulated transactions are subject to the OptBlue Assessment, OptBlue Card Not Present, OptBlue App Initiated Tran and OptBlue International Fees. Transactions from these new products will attract the Debit Rates and Transaction Fees, as shown below:

American Express is introducing an OptBlue Acquirer Assessment and Transaction Fee of $0.165% + $0.02, effective 4/22/2022. This fee is applied to all American Express non-debit card charges (credit and prepaid), not credits/refunds, submitted under the Program for all industries in the American Express Program Pricing Signing Guidelines.

Treasury environments are slowly evolving

Depending on the types of deposits your company is making, there may be some space for change, but most of our depository clients are not seeing the same kind of digital revolution we see elsewhere in corporate treasury.

Treasurers around the globe are trying to push for electronic payments because they are faster, cheaper, and easier than cash and card payments. With this new shift, where does that leave retailers who deal with cash and coin deposits, or whose clientele still wants to write checks? While there are some alternatives to branch deposits out there, there is nothing disruptive in the market right now that would allow treasurers to radically change how they accept deposits. When we cannot count on digital disruption to reduce costs, optimization and a clear understanding of the options on the market today are the best way for treasurers to improve their bottom line.

One of the most consistent things Redbridge sees with our international retail clients is a strong reliance on armored couriers and, in nearly equal measure, dissatisfaction with their couriers. While talking with one retail client recently, their Assistant Treasurer told us how a lack of transparency in armored courier fees and a complicated workflow for depositing into their smart safe pushed them to explore other depository providers. Couriers would show up late, stay longer than anticipated, or show up on the wrong day and our client would get hit with the fees on their account analysis statement with no explanation of why the fees varied month to month.

Shifting depository strategies

So where does that leave the retailer with cash and coin to deposit who is in a position to move away from their current armored courier? With banks in the US closing 5% of branches between 2017 and 2020 and the UK shuttering over 4,000 bank and building society branches in the last 6 years, companies around the world are coming to the same conclusion: going back to branch depository will not work.

Thankfully, though, there are some interesting options in the market that we see clients using with great success. For example, the retailer mentioned earlier opted to start making deposits with DTS Connex, a US provider with online cash management tools designed to work with any bank, courier, treasury, or ERP system. They are still storing cash onsite in a safe and waiting for a pickup, but a clear, easy-to-use bank agnostic deposit prep website and straightforward transparent pricing made the switch an easy decision. Another major retail client used DTS’s deposit-by-mail service for stores without a bank branch nearby.

For the retailer that receives a large amount of coins and doesn’t use a cash recycler, some stores have gotten even more creative. After all, it is hard to check out at the grocery store without seeing a box collecting coins for charity. Reduced coin deposits, a tax write-off at the end of the year, and social good? A win-win-win for those who use this strategy.

Globally, armored couriers can sometimes be the best option, especially in smaller or more remote countries. For those clients it may be best to reduce the number of pickups and work to negotiate a more transparent fee model with your courier and try to receive invoices you can review (and possibly challenge) instead of having the charges lumped into your bank fees.

Embracing in digitization

Your depository business is not only cash and coin, and luckily, there are a few more options out there for non-cash, non-electronic payments. For our US clients who rely on lockboxes but who would like to shift to a digital alternative, eLockboxes can use AI and machine learning to reduce the number of exceptions and drive down costs. In the US and EMEA we are seeing a proliferation of apps that enable agents in the field to automatically scan checks or take electronic payments, where they previously would have had to take cash or check. With these apps, as long as cellular data is available, payments can be deposited before the agent leaves the premises. Additionally, as your check scanner ages and needs to be replaced, a smart phone and an app may be a more cost-effective solution. These alternatives have the additional benefit of being a bit greener than traditional methods, allowing treasurers to enhance the services they are using while being able to contribute to a greener, less paper-dependent future.

The biggest trend we are seeing with our clients in the depository space, and the biggest trend we have seen in general, is a shift towards bank-agnostic providers to take over the business that banks are increasingly trying to move away from. While this does shift responsibility back onto clients to source providers and do some of the preparation and reconciliation they used to rely on the banks for, what they get is a more agile environment where changing banks doesn’t mean changing processes or system integrations. What once could have ballooned into a months-long project can be done with a few keystrokes on the back end of a third party system.

Innovation in LATAM

When we really try to look ahead to see what could be in store for our depository clients, we are looking at LATAM. While much of the world has spent the last two years figuring out the most efficient way to take contactless payment, LATAM had already leapt ahead and found a way to accept cash payments online. Customers can make their purchase via OXXO in Mexico, Boleto in Brazil, or Baloto in Colombia and then go to a centralized location to scan the bar code and pay for it with cash. Retailers and utility companies especially, we are curious – would you embrace this kind of change?

Constance Veron, Frederic Vincendon, & Sarah Gundle

A special report on the cash management & payment trends that will transform your treasury department in 2022

The growth and vitality of the payments industry has fascinated all observers during the past two years of the pandemic. Now with recent geopolitical developments arising from the Russia-Ukraine conflict, it is being tested again.

Our new publication analyzes the most prevalent trends and innovations in the treasury world today.

As the webinar made clear, there are now many different types of payment methods available to consumers and businesses, from traditional checks and ACH payments to electronic and digital options. While each method has its benefits, they also have associated costs. Determining the true cost of each payment method is important for companies to understand their financial impact.

Deranek says his organization uses a “combination of bank fee software, our treasury management system and something we call our ‘tier database.’ We’re really putting a lot of effort into it.” He says the company is conducting a modernization project because “we can’t do it manually. It’s just too overwhelming.”

A survey by AFP of cost awareness shows that most organizations are either aware or extremely aware of the costs associated with payments, depending on the type of payment. For example, 40% of survey respondents indicated that they are aware of the costs of checks, while 45% said they were extremely aware of these costs. So there is a high level of awareness of the costs. But how can organizations effectively calculate such costs?

Choosing a model for determining payment costs

Meyer offers some advice on how companies can calculate the true cost of different payment methods. The initial step is to isolate all charges related to the payment type, including those hiding in other product families.

“The first challenge to any project is the accessibility of data,” she says. “You need to understand if you’re going to be building this for a single bank or all of your banks. It’s not as simple as just looking at a PDF statement.”

Bank statements can also lack transparency. “Banks can add additional charges in the general account services section for credit and debit postings. You have to decide how accurate you want to make your model for determining payment costs.”

After the data for the model has been gathered, all one-time setup fees need to be removed. For Meyer, this approach to cost analysis is like a “jigsaw puzzle” because it involves assembling and putting together the various pieces. “Are we going to keep or remove all hard charges, exceptions, reporting, etc. Or are we taking them out and just focus on core processing charges? That’s going to be activity-based charges. It’s a big decision.”

Once this step is done, payments and collections need to be separated. “It may seem obvious, but it’s not that simple,” says Meyer.

After the data has been gathered and the decisions regarding modeling have been determined, it’s time to think about the divisor. As Meyer notes, “You can’t just take all of these line items that you’ve isolated on your analysis statement and add the volumes.” Instead, you need to isolate specific trigger volumes of line items to avoid duplication.

One service line does not tell the whole story. Including other items like ancillary costs, fraud charges and maintenance fees, for example, is very important. Meyer says the key question to ask is, “If I were to completely change from ACH to RTP transactions tomorrow, which services would go away?” Any services that would not disappear should be included in the model.

How AFP codes help

AFP codes allow organizations to sort data by product so they can easily identify the various charges on their statements. Each has a designated product family in the product code structure. Assigning the correct AFP codes makes it possible to easily filter prices and volumes. However, it is also important not to double any volumes.

Meyer says that ACH payments can be the most difficult product family to calculate correctly. This is because in many cases, banks do not differentiate between debits and credits. There are additional fees for credit postings in general services. And significant maintenance charges can swing results.

A case study in determining payment costs

HCSC offers a case study in managing bank fees. The company is currently implementing a payment modernization project that involves standardizing data. As part of this effort, the treasury department is trying to create a new foundation for evaluating both the company’s payment cost and its overall cost in bank fees.

“We know our business is swimming in data and we need to make sure that we’re in a position to use that data to make more informed decisions for the profitability of our business,” says Deranek.

The future is digital

One of the company’s main focuses is moving more payments to a digital format. “Obviously, you want to be more digital in your payments, but there are still those aspects where you’re doing checks. You can’t get away from it. It’s a slow process to convert it,” says Deranek.
According to the AFP survey, about 73% of responding organizations are currently moving B2B payments away from paper checks to electronic payments. The primary reasons for this shift are fraud prevention, reduced costs and increased efficiency.

While there may be some pain points when adopting automated payment solutions – including a lack of IT resources, existing supplier relationships (which would require a major effort to update) and multiple workflows – doing so can lead to operational efficiencies and make determining the true cost of payments easier.

Understanding costs propels the future

Understanding your true cost of payments is not an easy task. There are a number of factors involved, and considerable time and effort is required. However, taking the time to determine your true cost of payments will allow you to make informed decisions, build bridges across all departments and better prepare for the future.

What is ‘Buy now, pay later’?

BNPL is a service offered by various companies that allow consumers to online shop and divide purchases into multiple equal payment options.

Typically, the first installment is due at purchase, but most BNPL providers allow customers to pay in a weekly, bi-weekly, or monthly installment. This allows consumers to receive their purchase right away, while giving a flexible alternative to credit cards.

In the U.S. and across the globe, companies like Klarna, Sezzle, and Afterpay have dominated the BNPL landscape partnering up with large scale retailers like Walmart, Target, and Amazon to offer their services.

Key players in the BNPL field

Recently flooded with new players, only a few major players have dominated in the past year. These include: Afterpay, Affirm, Klarna, Zip (previously QuadPay), Sezzle, and now PayPal’s ‘Pay in 4’.

What are the benefits of retailers offering BNPL services?

Not only does BNPL offer consumers the benefit of financial flexibility and increasing purchasing power while making purchases online, but retailers offering this service have also seen significant benefits this past year. As Forbes notes, an estimated $99.4 billion in retail purchases will be made by consumers using BNPL programs in 2021, this is up from $24 billion made in 2020.

Many retailers currently offering BNPL payment options see similar benefits at the end of the day:

1. Lowering cart abandonment and sticker shock

Sticker shock is one of the main reasons consumers abandon their carts. The reality is, for large-ticket items in particular, many consumers simply cannot afford to spend a large sum of money in one transaction. This is where BNPL options provide some relief for consumers.

2. Increase sales and average order value

Retailers know the impact of abandoned carts have on the overall bottom line. This is why it is important to take measures to limit the number of abandoned carts in order to convert these customers.

Businesses who offer and prominently message alternative payment methods, like BNPL, to consumers see the immediate benefit: the BORN Group notes an increase in average order value of more than 30%, meaning that installment payments encourage larger basket sizes and higher-priced sales.

3. Building a larger consumer base

By providing additional, more flexible payment options, retailers – and truly any merchant – have the ability to expand their consumer base to a wider range of demographics. A BNPL option might attract customers who were previously hesitant to buy products because the price was out of their budget.

4. All while still receiving the Full upfront payment

With third-party BNPL providers, businesses don’t have to be wary of the potential risks of managing fraud cases, non-payment, or other related issues. BNPL providers will manage the automated billing, repayment, and fraud cases.

Why BNPL might not be the best solution for all retailers and consumers?

Although offering BNPL solutions can offer a variety of benefits for retailers and consumers, the merchants themselves pay the price for this consumer-friendly financing alternative. Buy Now Pay Later firms charge retailers significantly more than traditional card acceptance.

BNPL players charge consumers’ cards, or bank accounts, themselves, rather than the retailer, and pass on the cost as part of a bundled fee to retailers for different services provided.

According to Tom Richardson, of Financial Review, a typical Visa processing fee in the US is 3%, he says. A BNPL provider, like Sezzle for example, charges retailers fees around 6% plus 30 cents per transaction, with the pitch that this includes the 3% card fee. In most cases though, a 3% processing fee may be well above the actual cost of acquisition. The rate that BNPL companies charge retailers depend on different factors:

• Type of product or service
• Length of time the store has been in business
• What item is purchased

On the consumer end, BNPL can prove to become a slippery slope for a segment of users. BNPL services are often criticized for encouraging consumers to take on debt they might not be able afford.

In addition to these concerns, the BNPL payment option does come at a hefty price. One downside can be from missing scheduled payments that can result in late fees of up to 25% of the past-due amount, depending on the provider you use. Consumers may also mistake that the merchant assess the late fees, potentially damaging their reputation.

Additionally, if you don’t repay the balance amount in due time, you can be reported to the credit bureaus as delinquent.

Regulatory issues

The staggering growth of the Buy Now Pay Later industry is expected to attract the attention of financial regulators. Right now, “buy now, pay later” is not regulated in the way that credit cards are.

In the U.S., BNPL services are covered under the Dodd-Frank Act, which are enforced by the Consumer Financial Protection Bureau, but the federal “Truth in Lending Act” doesn’t apply to many BNPL provider services offered because it only covers credit products that involve at least five payments. This is why the ‘Pay in 4’ model has become so popular across most of the BNPL providers. That means there are no standards for disclosures on fees, amounts owed, credit reporting and payments.

California’s regulators are among the few U.S. watchdogs that have taken substantive actions against the services. Even though most “pay-in-four” products are exempt from those federal rules, California has classified some pay-later products as loans.

The future for BNPL

With COVID-19, there has been a shift in retail shopping and created a new normal. More and more consumers are more apt to making purchases online. According to IBIS World, industry revenue is forecasted to grow at an annualized 9.8% over five years through 2024-25, to $1.1 billion.

This industry expansion and growth has led other non-BNPL specialized fin-tech companies and providers, like PayPay, to offer similar ‘Pay in 4’ services. As a payment gateway service that most merchants already offer, PayPal clearly has, despite its late entrance into the game, a natural advantage.

In late September, Mastercard announced their first step towards offering a BNPL program in the U.S., Australia, and the UK. Their program announced is called “Mastercard Installments,” which allows Mastercard to act as a middle man by enabling banks and fintechs to utilize this installment program to offer loans directly.

Citibank, American Express, JPMorgan Chase, and Goldman Sachs (in partnership with Apple) have also announced future plans to offer ‘post-transaction’ financing options at much more affordable fees.

As we continue to see the growth of BNPL in the retail industry, we will see the expansion of major players in the merchant card and banking industry make a late but large wave in this future trend.

Hector Galvan & Gabriel Lucas

A special report on the cash management & payment trends that will transform your treasury department in 2022

The growth and vitality of the payments industry has fascinated all observers during the past two years of the pandemic. Now with recent geopolitical developments arising from the Russia-Ukraine conflict, it is being tested again.

Our new publication analyzes the most prevalent trends and innovations in the treasury world today.

At the MAG mid-year conference earlier this February, a panel of key stakeholders in the payments ecosystem gathered to discuss the latest in payments technology. Here are the practical insights from panelists at Nordstrom, Elavon, MasterCard, and Redbridge.

Angie Grunte, Managing Director at Redbridge says, “Having a well-established yet flexible payment strategy is key to being able to effectively adopt new payment types and methods. However you must first determine which options will truly create the best experience for your customers and value for the organization.”

“For us, it came down to looking at what platforms were available,” says Daniel Crisologo, Director of Payments at Nordstrom. “There were a lot of criteria that we needed to look at.” These criteria included the number of new customers coming into the sales funnel, a virtual card versus API integration and the cost differential compared to the ease of use for the consumer. “At Nordstrom, we always focus on the user experience first,” says Crisologo. “Obviously, cost is a factor, but the user experience is paramount.”

Joe Myers, President, Elavon North America, a global payment processor, notes that there several critical points for merchants to consider. “The integration path, how it all comes together. The experience for consumers and how easy it is for them to adopt and use.” Ultimately, he notes, it’s about expanding the options for consumers to be able to purchase goods, either in-store or online.

Referring to his company’s involvement with acquirers and merchants, Pablo Cohan, Senior Vice President of Digital Solutions at MasterCard, says, “There are a lot of options out there, so we need to take a step back and understand the (merchant’s) pain points.” He notes that MasterCard is focused on giving lenders the ability to attract consumers to the platform and providing those consumers with purchasing power.

What to consider during implementation

There can be challenges during the implementation of any new channel and this is also true for buy now, pay later.

Nordstrom’s Crisologo, noting the biggest challenges the retailer faced during the implementation of its buy now, pay later program, says “Having an effective testing platform is important. As is understanding the success metrics and making sure you can measure these effectively.”

In addition to metrics, there is also the question of the type of implementation. Says Crisologo: “You have to decide whether you want quick and easy, which is a virtual card and API integration, or a hybrid of the two.” Whatever type of implementation a merchant chooses, it is important to try the product before using them. “If I had the opportunity to go back, I would use the product a lot more to make sure some of the gaps in servicing were resolved.” Another important aspect to consider is the amount of time for integration. How long will it take for the program to be up and running so the merchant can take advantage of the channel? In Crisologo’s experience, it doesn’t necessarily have to be that long. “They’re very good at rolling these out. It’s literally a tap and go transaction. It’s super easy.”

There is significant involvement from all key players during the implementation phase. MasterCard’s Cohan notes that his company is “very involved” with its acquirers and merchants during the implementation phase. “We’re highly engaged to make sure everyone’s ready for that first transaction to work without a problem. This is a turnkey solution with a low investment and if it drives volume and value, then great.”

Following up: data and privacy are paramount

The evaluation of the program doesn’t stop once it has been implemented, though. There may be some difficult situations that arise for merchants and consumers. This includes fallout, for example. Myers notes that this can be a problem: “If there’s a consumer in the store looking to get approval and expecting to get approved and they don’t, that causes frustration.”

While there may be some difficulties, for merchants like Nordstrom, the benefits clearly outweigh any negative factors. Notes Myers, “Giving that choice across payment methods and driving activity and, ultimately, sales and revenue” are some of the key benefits. Nordstrom’s Crisologo agrees: “We want our customers to be able to choose the platform that they use.” And the company has seen significant growth in customer acquisition and incremental sales as a result. Once the channel has been implemented, it needs to be tracked and measured. And that requires a basic infrastructure to gauge the success of the program. “Data is 100% a key part of that,” says Crisologo. “You want to be able quickly learn and evolve.”

As with everything, privacy is also a major concern. The data that is generated needs “to be used only for the purpose for which it is intended,” as Cohan says. “Anything else without consumer consent is not okay.” Merchants need to spend a lot of time talking with their legal and security teams about this topic. Merchants also need to think about the breakeven point for accepting buy now, pay later transactions to make sure it’s a sustainable channel in the long term. “Where incrementality is helping to offset the costs, when does the funnel dry out?” asks Crisologo.

An evolving channel – with lots of promise

What is the future of buy now, pay later? How will it evolve? While there are still questions about how buy now, pay later will change over time, the channel is off to a good start, with acceptance among both consumers and merchants increasing and transaction volumes rising.

Redbridge’s Grunte remarks that “As the buy now, pay later space continues to evolve, it is important to be selective in choosing the right partners and being prepared to deal with dynamic changes as the market continues to develop and face regulatory scrutiny.”