For most of us, a bank holiday means a day when your financial institution (FI) is closed. For those old enough to remember, it may conjure memories of March 6, 1933, when President Roosevelt shut down all FIs in the U.S. for a week to restore calm after consumers had withdrawn large sums of cash over the previous month. It’s this second meaning that comes to mind after a federal judge recently indicated she is unlikely to approve a settlement between the major card brands and merchants over the fees that merchants pay to accept credit and debit cards as payment.
Merchants have been at odds with the card brands and FIs over these fees, often referred to as interchange, for a long time. The legal battle has been going on for over 20 years, and there is no end in sight. Yet, I believe this issue can be resolved amicably among all parties rather quickly. Following the wise precedent of President Roosevelt, let’s have a credit and debit card “holiday.” Yes, a good old-fashioned Payment Card Holiday a la 1933.
A 2024 Payment Card Holiday
Here’s what the 2024 version would look like: The card brands would simply stop operating. Notify all employees, power down all computers, turn off the lights, and walk away for a week of well-deserved rest.
To their delight, merchants would not have to pay the onerous interchange fees for an entire week. Finally, freedom from the tyranny of the card brands. However, daily operations would require some adjustments. Here’s a merchant planning guide for the 2024 Payment Card Holiday using data from the recently released 2023 Survey and Diary of Consumer Payment Choice: Summary Results by the Federal Reserve Bank of Atlanta.1 Note that this information is based on all forms and types of payments which includes merchants and other businesses. Your planning guide may need to be tweaked based on card usage in your industry or merchant category code.
In 2023, 64.8% of all U.S. consumer purchases were made using some type of card—a credit card, debit card, or prepaid card. The good news is that 16% of consumer purchases were paid using cash and 2.7% using checks. So, consumers have a familiar fallback option to make their purchases for the week. The only issue is that the median amount of cash a consumer carries is US$20. In other words, half of all U.S. consumers only have US$20 on them when they walk into your store. Make sure to place a sign on all store entrances stating only cash or checks are accepted for payment. Otherwise, be prepared to have a lot of empty carts by the registers for people to place items they cannot afford to buy since they don’t have enough cash on hand. You may also need to staff up to handle the restocking of those items people couldn’t buy.
That brings up another point. Consumers will likely have an opinion to share with you about the Payment Card Holiday. Guest services may need some extra staffing to have those conversations.
With all that cash on hand, contact your cash delivery service provider. You are going to need more money in the cash registers to handle change, and those money bags will be too big to fit into branch depositories. You will need to arrange for cash pick up each night. I hope you have cash-counting machines in your stores. It’s going to take a while to count the cash each night to know how much you are depositing. Otherwise, I’m sure your FI will count the money for you and let you know the next day (or two) how much you deposited. Your finance department will surely understand.
You may also need to staff up to have more checkout lines open. It is going to take a little longer for people to check out if they are writing checks. And make sure the checkout lines have some extra pens available too. Oh wait, that may not be needed. Since only 2.7% of consumer purchases were made using a check, most consumers aren’t going to have their checkbooks with them.
E-commerce merchants are going to have a little tougher time. In a 2023 Datos Insights study, 94% to 97% of online merchants accept credit or debit cards from American Express, Mastercard, and Visa, compared to 63% that accept bank transfers (via a routing number and account number). Your IT department will need to pull an all-nighter to update the checkout page so consumers can enroll in a bank transfer payment option. You can always ramp up your call center staff and list its number on your check out page to set up payment on delivery. I’m sure UPS, FedEx, and the postal service will gladly collect cash or checks on delivery for you. It’s pretty popular in Germany, so they can share with you the finer points of how it works.
Some types of merchants are likely to have more issues than others. According to the Federal Reserve study, the three categories of merchants with the highest number of consumer payments are grocery stores, convenience stores, and pharmacies (19.2%); stores, including online shopping (16.2%); and fast food, coffee shops, cafeterias, and food trucks (14.6%). Since nearly 65% of all consumer purchases were made using a card in 2023, these merchants are going to be in for quite a surprise. The good news is that food trucks should fare better than the others since they can set up shop in a bank and credit union parking lot so that people have easy access to cash.
I bet that consumers are going to take a trip down memory lane when they go to fill up their cars and trucks. Nine percent of consumer payments occur at gas stations. I recall the days of walking into the gas station and handing over cash—US$35 on pump four, please! Oh, wait, half of U.S. consumers only carry US$20. Oh well, a quarter tank of gas should get them to the nearest branch to get some cash.
Merchants have the option to select which payment methods they support. If interchange fees are viewed to be too high, merchants can elect not to support them. However, there is a reason they still accept cards: Consumers have a strong preference for them. For in-store purchases, over 75% of consumers prefer to use a card (credit cards at 36.2% and debit cards at 39%). For online payments, that number swells to over 92% (credit cards at 56.9% and debit cards at 35.2%). Merchants can offer tender-steering programs to incentivize consumers to pay using something other than cards. Yet, you rarely see them. Cash-only stores are few and far between.
Who Benefits?
Let’s be clear. If, at the end of this lawsuit, interchange fees are lowered, there is only one winner: merchants. Their cost of card acceptance goes down, leading to higher profits. However, only two-thirds of merchants would see this benefit. In a 2024 study, Datos Insights found that 35% of merchants have negotiated a flat rate for card processing fees, so lowering interchange rates would not affect them.
The real losers will be consumers. If FIs realize lower income from reduced interchange fees, they will pass on the cost to cardholders in the form of reduced or no credit card rewards, new or higher annual fees to have a credit card, or transaction fees on debit card purchases. For proof, look at what happened when the Durbin Amendment (part of the Dodd-Frank bill) went into effect, capping interchange fees on debit card transactions. Debit card reward programs disappeared overnight, and merchants did not lower their prices. Merchants, please do not insult the intelligence of U.S. consumers by arguing that you will lower your prices if interchange fees go down. I don’t see a reversal of shrinkflation. My 14.5-ounce can of corn has never gone back to 16 ounces.
Merchants are buyers of card acceptance solutions; the card networks are the sellers of the service. If accepting cards is too expensive, merchants can opt not to accept cards, but they know it would be disastrous to their businesses. Merchants have lost sight of all the benefits cards have provided them over the years, such as higher average purchase amounts (i.e., higher revenue), faster checkout times, and lower cash handling expenses. Consumers don’t like the high cost of gasoline or electricity, but I haven’t seen a class action lawsuit against oil companies or utilities to lower these costs.
This lawsuit is all about using the courts to negotiate a lower cost for a service merchants know they desperately need. A Payment Card Holiday could bring it to a quick end.
- “2023 Survey and Diary of Consumer Payment Choice: Summary Results,” Federal Reserve Bank of Atlanta, 2024, accessed June 21, 2024, https://www.atlantafed.org/-/media/documents/banking/consumer-payments/survey-diary-consumer-payment-choice/2023/sdcpc_2023_report.pdf. ↩︎
