Credit cards and the true cost of interchange in B2B payments

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I recently chatted with Roger McNamara, a 25+-year veteran of the payments industry, most recently as the Director of Business Development with American Express in the U.S.

We started chatting about the impact of COVID-19 on B2C credit card business and why B2B transactions are increasingly becoming so important to card networks. If your card business has a heavy T&E component, you are taking a major hit due to the coronavirus.

Roger believes B2B is the next evolution for cards. But as we all know, it’s not like a B2C merchant where the transaction takes place face-to-face and you get your goods immediately or through e-commerce, where the goods arrive within a day or two.

B2B transactions have disputes, invoices, adjustments, etc. Roger says in a recent blog post:

In most cases, B2B Cardholders purchase items and take term from the supplier of 30/60 maybe even 90 days. In that process, suppliers finance the transaction and act like a bank for their customers. In giving term, they incur varying costs associated with this term. They must credit risk the buyer, that costs, they must invoice the buyer, that costs, they must call the buyer when payment is a no-show … you get the picture. Giving term can be an expensive business. Now imagine after all that cost has been applied to the Term, the buyer calls the supplier on day 45 and tells them they want to pay with a credit card. That is when all the S’s start — Surcharging, Suppression and Switching.

Unlike B2C, where the merchant sales pitch is higher spending with card (and increasingly convenience + safety due to COVID-19) in combination with cardmembers pulling due to loyalty points, this just does not apply in B2B.

In B2B, if a supplier does not want to take card, you find another way to pay them. You don’t elect not to buy (unless there are many suppliers of the same product), and you don’t buy less.

Roger related his experience selling into industry sectors. When a card network wanted to enter a B2C industry, they did so with some sort of special pricing such as in Supermarkets, Recurring Billing, and Insurance. Once the card network felt it had a sufficient foothold and consumer insistence was high, interchange and discount rates slowly crept to more profitable levels for issuers. But with B2B transactions, the card networks have come in high and continue to go higher. Published Interchange would suggest that these costs are now 2.5% to 4%.

His belief is that to see more B2B increase, buyers need to exchange terms for use of cards. But the networks never educated the companies, and they are left with a legacy where he says cards are a poor stepchild. It’s hard for businesses to change their process. Suppliers are conditioned on 30 or 45 days now to do business, and it’s difficult for many suppliers to take card because, in many industries, margins are thin and 2.5% to 4% matters.

Considering that cards compete with payment terms, the issue really is economics. Sellers can pay from 1.5% to 4% to accelerate payment via card. When doing a complete cost-analysis that compares terms vs. card payment, the true cost of interchange must be included. It does not only include the interchange (a percentage of the invoice value, say 2.95% up to 4%) but also assessment fees, transaction fees, fees to payment service providers, and brand usage fees.

In Roger’s experience, few companies understand the true cost of B2B commercial cards.

Imagine a Visa corporate card — the interchange for accepting the card is 2.95% and 10 basis points (bps) transaction fee. Add assessment fees (typically 15 bps of the transaction amount) and brand usage fees, which are non-negotiable fees, plus a processor fee adding 10 cents per transaction. Card networks collect fees, called dues and assessments, for using their network. So for transaction values that are relatively small, fixed transaction fees can add significantly to the overall percentage and make the base interchange misleading.

In February, Visa issued a statement about revising some fees:

“The U.S. credit interchange structure has been largely unchanged for the past 10 years,” Visa said. … “Based on the most recent review in the U.S., Visa is adjusting its default U.S. interchange rate structure to optimize acceptance and usage and reflect the current value of Visa products.”

While the changes amount to just a few cents on every transaction, those pennies add up. Swipe fees are already a flashpoint between merchants, banks and payment networks such as Visa and Mastercard Inc. Retailers have long complained about the more than $100 billion they spend each year to accept electronic payments, a figure that’s grown in recent years as fees increase and consumers flock to premium cards, which carry higher interchange rates.

The race to develop B2B payment and finance products is on with the card networks. Both Visa and Mastercard are making heavy bets in this space.

But if your average payment terms are 30 or 45 days, and say you extend it to 37 days with payment and the cash application, B2B card solutions that accelerate your payment to 10 or 15 have a tough sell, unless fees come down.

David Gustin runs Global Business Intelligence, a research and advisory practice focused on the intersection of payments, trade finance, trade credit and working capital. He can be reached at dgustin (at) globalbanking.com.

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