By Patti Murphy
There was a hotbed of activity in the payments space in 2018, and much of that will continue into the New Year. Activities I'll be keeping tabs on throughout 2019 include real-time payments, mobile POS payments, merchant card acceptance costs and card acceptance by businesses selling cannabis products.
The Federal Reserve continued to push for development of new, faster payment systems in 2018, even as legacy payment systems, like the check and automated clearing house (ACH) systems, continued to get better and faster. Same-day ACH settlement is now a reality in the United States, and ongoing digitization of check clearing has dramatically compressed the clearing cycle to the point that it is not uncommon for checks to settle on a same-day or next-day basis.
While several initiatives have emerged domestically that leverage electronic network technologies for faster payments, none can support real-time settlement. That's because no real-time settlement mechanism that operates 24/7/365 exists in the United States. The only national net-settlement service, operated by the Fed, operates Monday through Friday from 7:30 a.m. to 5:30 p.m. Eastern, and is closed on national holidays.
The Fed last year requested public comment on a series of steps it could take to support real-time payments, including development of a real-time gross settlement service operated by the Reserve Bank System on a 24/7/365 basis. But given the protracted nature of the Fed's decision processes, it could take a year or more before it proposes specific services, and several additional years for work on such a service to be completed.
Even if the Fed moves toward real-time, 24/7/365 settlement, it's unclear whether significant volumes of payments will migrate to real-time networks. Current models are focused on the credit-push approach to payments, where businesses and consumers authorize their banks to push (send) money to billers or other entities. The ACH is commonly used for credit-push payments. Checks represent debit-pull payments: payees instruct their banks to collect (pull) money from payors' bank accounts.
"Business end users have consistently found credit push payments unacceptable for more than three decades, so the road to business ubiquitous use of a new, credit push payment will be long and expensive, if ever successful," David Walker, president of Tiller Endeavors LLC, and industry consultant Phyllis Meryerson wrote in a joint comment letter to the Fed. Walker and Myerson are former executives of the Electronic Check Clearing House Organization.
Mobile payments have been a hot topic for several years, but even a proliferation of mobile payment apps has failed to significantly move the needle on adoption. This is likely to continue through 2019.
The market research firm Ipsos attributes sluggish growth to a mismatch of priorities among major stakeholders in the mobile payments space. "The five major sectors enabling a mobile POS payment – retailers, banks, fintech players, credit card networks and processors – represent dozens of top brands, each with their own business needs, agendas, and consumer appeal," the firm wrote. "But it gets even more complicated when you consider consumers' needs, and those of merchants that accept card payments."
Ipsos expects frequency of usage to grow among existing users, who could be using their mobile wallets upwards of five times a week by 2020.
Merchant complaints about the rising cost of card acceptance are nothing new, but in 2018 a small but growing army of ISOs and merchant level salespeople began selling innovative cash discount programs that effectively allow merchants to pass off the cost of card acceptance to customers who pay by card. Visa warned that many of these programs may violate its rules, but program sales continue.
Meanwhile, the laws in several states that prohibit merchants from surcharging credit card payments are under a legal cloud. A federal appeals court in August 2018 declared that the Texas law banning surcharges infringed upon merchants' First Amendment free speech rights. The ruling followed similar federal court rulings that rebuked the surcharging prohibitions in New York, California and Florida.
Most experts expect one or more of these cases will land on the docket of the U.S. Supreme Court. The High Court signaled back in 2017 that it would likely strike down the laws when it sent the case challenging New York's anti-surcharging law back to a federal appeals court to reconsider with an eye toward First Amendment rights.
Legislation signed into law in the waning days of 2018 removed hemp from the federal list of drugs deemed illegal under the Controlled Substances Act of 1970, reclassifying it as an agricultural crop, just like wheat and soybeans. Now companies selling products derived from hemp – like cannabidiol (or CBD for short) – would seem fair game for merchant acquirers and their sales partners.
Hemp is a variety of the cannabis plant that is low in THC, unlike marijuana, which contains more of the psychoactive substance. Hemp is used primarily in industrial applications, but also contains CBD, a non-psychoactive compound also found in marijuana that has been shown to have significant healing benefits.
The market for CBD products – which include tinctures, lotions, mists, infused drinks and candies – is huge and growing. New Frontier Data, a Washington, D.C.-based research firm, expects the U.S. hemp industry to grow by more than 18 percent over the next five years, led by hemp-derived CBD products, which are expected to grow from $390 million in sales in 2018 to $1.3 billion by 2022.
The relationship between CBD and marijuana, and federal prohibitions on hemp and marijuana, have kept most merchant acquirers and ISOs from boarding businesses that sell CBD products. Some ISOs have been selling workarounds that avoid credit card networks, including decoupled debit programs, which leverage the ACH network, and cashless ATM systems (also known as POS banking systems), which ride the ATM network rails.
Last year at least one leading acquirer, Elavon, informed sales partners it would begin accepting applications for businesses selling hemp and CDB oils. Other acquirers and ISOs may soon follow.
Loosening federal strictures around hemp, ongoing state initiatives legalizing medicinal and recreational uses of marijuana (now 32 states and the District of Columbia), and burgeoning sales of CBD products add up to ample opportunities for expanding card acceptance in this emerging market.
Patti Murphy is senior editor at The Green Sheet and president of ProScribes Inc. Follow her on Twitter @GS_PayMaven.
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