Merchant Mobile Apps: A Growing Threat To Banks’ Interchange Revenue

Merchants have long fought interchange fees through regulatory efforts and public disservice messages claiming that consumers pay "swipe fees." Those initiatives may helped produce the Durbin Amendment (which limited interchange fees on debit cards), but by and large, merchants have failed to stem the interchange tide.

That may change.

A consumer study from Synchrony claims that merchant mobile apps are gaining traction, and more importantly, changing consumer behavior. According to the study:

  • Consumers are increasingly using merchant mobile apps. Two-thirds of survey respondents have downloaded a retail app, and those that have use twice as many retail apps now than they did a year ago. Overall, 83% of consumers said they are happy with the experience of their retail app, which Synchrony interprets as a sign that consumers will increase shopping using retail apps in the future.
  • Consumers are increasingly purchasing through merchant mobile apps. From a bankers' perspective, perhaps the most important statistic in Synchrony's survey is the 49% of respondents who said they're making purchases through retailers' apps. In addition, more than half of consumers (53%) said the apps they use have card servicing features, and of those that do, three-quarters rated the features as "extremely" or "very" valuable.
  • Many consumers think mobile wallets will replace physical ones by 2025. Six in 10 US consumers believe that by the year 2025, the average shopper will carry their phone and no physical wallet. Overall, 42% of consumers are ready to leave their physical wallets at home today, with 61% of older Millennials expressing that willingness.

In light of these results, it's not surprising that retailers are stepping up their mobile app initiatives. Synchrony's surveys of merchants found that nearly half are placing a "significant focus" on mobile apps, and three-quarters of retailers with more than $100 million in sales having already deployed mobile wallets.

Although the "Pays" (Apple, Google, Samsung) are seeing increasing transaction volume, one line of argument favors retailers' mobile wallet offering over the tech giants. According to Retail Dive:

"Rewards programs are one of the biggest driving forces for mobile wallet adoption, [because] a mobile wallet can replace everything your normal wallet does, including making payments and making sure you can collect discounts and rewards for being a good customer. Ultimately, the link between the payment and the rewards experience is seamless, thereby removing friction from the enrollment and rewards processes for both consumers and retailers. This makes retail-branded wallets easier to use than universal wallets, and that’s why they are being adopted at a faster rate."

Continued adoption of merchant apps for payment purposes threatens banks' interchange revenue. Banks and credit unions should define planning scenarios that take into account significantly reduced fee volume. 

Merchants have tried mightily to steer consumers' payment options away from high interchange choices for a while, with little to no success. The reasons for the failure isn't rocket science: habits and economics.

Retailers with high-ticket items might get a customer to open a merchant-branded account for a purchase, but for frequent, everyday, lower-priced items, getting consumers to change their behavior introduces friction. Consumers don't like friction.

What consumers do like, though, is getting rewarded for their card usage. Again, some merchants may be able to steer a purchase away from a reward card with a discount offer, but for the majority of purchases, maximizing points is paramount to consumers.

Merchant mobile apps--following in Starbucks' footsteps--provide a happy compromise. Consumers load funds onto the merchant app using their favorite card (running up points) and while the merchant pays an interchange fee on that transaction, they save on the subsequent purchases the customer makes paying down the balance.

Two Problems for Banks and Credit Unions

As consumers increasingly adopt merchant apps to pay, this spells two problems for banks and credit unions: 1) reduced interchange revenue, and 2) deposit displacement.

The interchange threat isn't limited to merchant apps, either. According to Cornerstone Advisors senior director Tony DeSanctis: "The risk of merchant wallets being funded with Venmo, Square Cash or even Zelle means that almost all of the interchange is at risk."

And as we've reported here before, many consumers are open to using P2P payment tools for their retail purchases.

Bottom line: Addressing the threats to interchange revenue needs to be on banks' and credit unions' fall straetgic planning agendas.

Ron Shevlin
Director of Research
Cornerstone Advisors