Earlier this week, Amazon announced that it would stop accepting Visa credit cards issued in the U.K. due to high interchange fees on transactions. The company gave a deadline of January 19 and is offering consumers who primarily use Visa cards £20 off a purchase as an incentive to update their preferred payment method.
The move followed similar efforts by Amazon to curtail the use of Visa-issued credit cards in Singapore and Australia, markets where the e-commerce giant introduced a 0.5% surcharge on transactions made with those cards. In both cases, Amazon also offered customers gift cards to encourage them to switch payment methods.
While Amazon is asserting its market dominance in an effort to lower transaction fees — which a company spokesperson said “[continue] to be an obstacle for businesses striving to provide the best prices for customers” — it is hardly alone in its desire to ween customers off high-cost payment methods.
For merchants, the introduction of “buy now, pay later” (BNPL) payment options, the rise of digital wallets and a broader push toward ACH or account-to-account (A2A) transactions are all part of a strategy to reduce consumers’ overreliance on credit cards.
For today, let’s focus on BNPL and why it is becoming a more attractive payment option for big e-commerce companies like Amazon and Walmart, as well as merchant marketplaces like Square and Shopify.
Not just bigger shopping carts
For years, the key selling point of BNPL services like Affirm, Afterpay and Klarna was that they allowed merchants to increase the average order value while also reducing cart abandonment.
Affirm’s merchant transaction fees vary depending on the structure of the installment offering, which takes into account things like the cart size, length of term and whether those loans are offered to the consumer as 0% APR or interest-bearing installments.
For merchants like Peloton or Purple, which typically sell high-ticket items and offer customers 0% APR installments over longer periods, the merchant discount rate (or fee charged to merchants to facilitate a transaction) will range from 4%-8% for a 3-12 month term or 8%-15% for 13-60 months.
But for companies like Amazon and Walmart, where interest-bearing installments are offered for cart sizes as low as $50, the merchant discount rate is 2%-5%. Since Affirm makes money from the interest, which it either keeps on its balance sheet or sells to capital partners on a forward-flow basis, the transaction fees are much lower.
Compare that to Visa’s planned interchange fees for next year: For a traditional card, fees will increase to 1.99% from 1.9% currently, and for premium cards, Visa’s fee will rise to 2.6% from 2.5%.
In its 8K, Affirm has this to say about the terms of the Amazon deal:
[W]ith respect to certain transactions on Amazon.com financed through Affirm’s products and services, Amazon Services will pay Affirm a fee that will be generally equal to a percentage of the amount of each transaction financed through Affirm’s products and services on Amazon.com plus, in certain instances, a fixed amount as set forth in the Commercial Agreement.
While it doesn’t go into the percentages agreed to, there’s a good chance that Amazon’s rates will be on the lower end of 2%-5%, due to the amount of volume they will likely drive Affirm’s way. At the same time, Amazon will receive the benefit of increased average order volume and data around purchases that customers finance through Affirm.
By stretching out payments over low- or no-interest installments, consumers were more likely to complete purchases and actually buy more than they would if they were paying with credit or debit. Furthermore, the BNPL option is often seen as more transparent to the end purchaser.
But beyond just growing the potential shopping cart size, BNPL options could also increase the overall customer funnel by underwriting customers who might not traditionally qualify for a credit card. In a request for proposal reviewed by The Wall Street Journal, Amazon said it was looking for “commitments to underwrite competitively to widen the acquisition funnel.”
In short, more potential customers spend more money with lower shopping cart drop-off. It’s a win-win-win for merchants like Amazon and Walmart.
Bringing BNPL in-house
The “buy now, pay later” pitch becomes even more attractive when you can get all the potential benefits without having to pay the transaction fees involved. That might be one reason why Square announced its plans to acquire Australian BNPL provider Afterpay for $29 billion.
As my colleague Mary Ann Azevedo wrote at the time the deal was announced:
The addition of Afterpay, the companies’ statement said, will “accelerate Square’s strategic priorities” for its Seller and Cash App ecosystems. Square plans to integrate Afterpay into its existing Seller and Cash App business units, so that even “the smallest of merchants” can offer buy now, pay later at checkout. The integration will also give Afterpay consumers the ability to manage their installment payments directly in Cash App. Cash App customers will be able to find merchants and buy now, pay later (BNPL) offers directly within the app.
Part of the impetus for Square to bring Afterpay in-house was to take advantage of the financing capabilities that come with enabling BNPL for all of its merchants. But one lesser-appreciated aspect of the deal is the ability to provide another payment alternative to credit card transactions, which could lower the fees Square merchants pay for purchases made online or through its point-of-sale systems.
Square was already making inroads with Cash App Pay, which gives users of its Cash App the ability to use funds from the digital wallet to purchase goods from Square sellers. We’ll cover the rise of digital wallets in a later post, but for now it’s worth highlighting that any funds and purchases made through Cash App Pay are funded via ACH banking rails at a fraction of the cost of a credit card transaction.
By owning Afterpay and combining it with the Cash App ecosystem, Square not only has the means to increase conversions and order volumes, but it also could drastically reduce the average cost of merchant transactions made through its network.
While it’s clear that Affirm values its independence and relishes its spot as being available on sites that account for 60% of online commerce in the U.S., it wouldn’t be surprising to see other BNPL players swallowed up by online retailers or e-commerce platforms.
In the meantime, we’re likely to see more BNPL partnerships and adoption as retailers seek to grow their top-line sales, reach new customers and move beyond credit cards as a primary payment method.