How to master payments in NORAM

Analysts agree that low-stress payment experiences are the key to high conversion rates online. An understanding of local payment methods is important, but there are further considerations to localizing your US payment strategy. The regulatory landscape of the US is vastly different to the European Economic Area and the UK. This has knock-on effects on the cost of interchange fees in credit and debit card processing. Recent regulation also presents opportunities for cost optimization via PINless debit routing.

In terms of culture, social media payments are of increasing relevance, although they’re not nearly as big in the US as they are in China. That doesn’t mean that mobile payments can be ignored altogether – the market share of digital wallets in online shopping among US consumers is forecast at 52% in 2027.

In this piece, I’ll cover three major topics to help you master payments in North America: PINless debit, interchange fee optimization, and strategizing on payment methods. 

PINless debit: What, why, how

What: A 2022 update to the Durbin Amendment (known as Reg II 2.0) mandated that card-not-present payments with a debit card must be able to be routed through at least two unaffiliated networks. This would allow merchants to choose which payment rails to route debit card payments through (including card-not-present payments, such as online payments).  

This is a technology change which all issuers must implement, however, not all issuers are compliant with the mandate. This adds complexity to the payment infrastructure needed to handle such transactions, and the calculations needed to work out whether investment into PINless debit will be worth it for your business.

Why: There’s a cost and potential approval rate benefit to be realized from routing your payments this way. Reason being, you will pay the lower interchange fee rate of the available networks. The network rates for debit rails are often lower than signature network rails, too. You can also benefit from improved acceptance rates, because of the opportunity for pushing the transaction through to alternative rails should one reject it the first time around.

Why not: Network tokens are not established in the PINless debit world, which may detract from your willingness to enable it. This depends on how much benefit your business currently extracts from network token use.

Who: This is worthwhile for some merchants, but you’ll need to weigh your customers’ card mix, namely, the proportions of debit and credit card use. Your MCC, average transaction value, and other factors also affect the cost-benefit analysis.

How: Payments service providers have established connectivity to the debit networks, so they are best placed to manage these relationships on your behalf. You could split your traffic to route some payments through PINless debit as an A/B test, and then commit to increasing the traffic proportion if you see positive results.

Interchange fee optimization

The interchange fee makes up the greatest proportion of the Merchant Discount Rate – the fee you pay to your payment services provider (PSP) for processing your transactions. It’s not a fee which the PSP earns – it’s settled to the card issuer. Nonetheless, your PSP could help you to manage your transaction flows to bring your interchange fees into alignment with your business goals.

The US has hundreds of different interchange fee rates which your transactions could fall into. Variables around MCC, payment card type, location and other data elements all contribute to the fee bracket. Fees range anywhere from as little as five basis points plus 22 cents for a regulated debit card all the way up to 300 plus basis points for other card types.

Often, managing processing costs comes down to avoiding downgrades. In certain instances, transactions with more data included can fall into interchange fee brackets which are more favorable. One example is passing on Level 3 data for corporate and purchasing card payments, which can bring interchange rates down from around 2.7% to below 2% on such transactions.

Card networks also offer preferential rates for transactions using Network Tokens. This is a complex topic with its own costs involved. My colleagues have put together a full region-specific guide on managing interchange and network fees in the US, which provides more detail on tokenization and all of the above mentioned cost optimization strategies.

There are also more simple ways to mitigate transaction fees, such as encouraging customers to pay for subscriptions once per year, rather than monthly.

“If a customer pays with a debit card 12 times a year, we eat that 22 cent transaction cost 12 times,” explains Gus Jacobs, Director of Payments at the New York Times. “But if we can migrate them to an annual subscription, their net impact from a cost perspective is mitigated drastically.”

Strategizing on payment methods

Digital payments are set to increase in the US, with a projected average annual growth rate of 14.9% (2022–2027) and a total market volume of US$3.52 trillion by 2027. The convenience, speed and ease of use for digital payments on mobile and desktop devices are key factors.

That’s why merchants should pay close attention to the customer experience of paying online. Consider offering a range of convenient payment methods, including digital wallets and payment apps. This will need careful consideration based on your business model and customers’ payment preferences.

Transaction value versus payment processing costs 

One calculation you may find valuable is the balance between customer lifetime value (LTV) or average transaction value (depending on which is more relevant for your business) and the cost of various methods of payment processing. This proved salient for The New York Times, where digital subscriptions are a major revenue source.

“There are markets where alternative payment methods are more cost effective and have better customer lifetime value outcomes than card payments. We'd like to get to a place where the payment options we present to customers balance cost and lifetime value as well as conversion,” shares Gus Jacobs.

Digital wallets: acceptance rates and customer experience

Another major consideration is acceptance rates (AR)  – the ratio of attempted payments versus those that are successfully settled – of various payment methods. This can be a beneficial measure of return on investment.

Google Pay and Apple Pay tend to have very high acceptance rates. As digital wallets, they can hold multiple payment cards, offering fallbacks in the event of payment failures. The challenge flows also tend to offer a positive user experience, particularly on a mobile, as users can easily authenticate payments with biometric data. These payments are automatically tokenized, which offers security benefits, as well as favorable network rates (in certain cases).

One potential downside of digital wallets is the potential impact on customer data access; Apple Pay may not provide you with customers’ email addresses, which can make customer relationship management more challenging.

Mastering payments with Checkout.com

As you’re looking to capture conversions at checkout, consider the in-market expertise you need. Our payment success managers at Checkout.com dive deep into merchants’ payment challenges, looking for quick wins as well as long-term opportunities for revenue improvement. 

Our machine learning payment routing engine, Intelligent Acceptance, increases the proportion of your attempted versus successful payments. It uses billions of data points to automate compliance, boost authorization rates, and block fraud in line with your business’s risk appetite. 

You can add or remove payment methods easily with Flow, the flexible payment page component that guides customers to correctly enter their payment details at checkout. It dynamically adapts to offer preferred payment methods based on the device, language, and location of your customers.