Visa and Mastercard Might Have a Deal to Lower Merchant Fees

Visa and Mastercard make money two main ways. They charge merchants a fee. They also take a fee upon the loan they offer consumers who don't pay their credit card bills in full every month. Most sophisticated consumers pay their cards in full every month and do not earn the card networks any loan fees. These consumers have no need to actually use a card and either have the capital to pay for their purchases outright or have enough wealth that they can borrow against their wealth to pay for goods at much lower rates than credit card rates. As such, rewards are an incentive to keep this user on the platform. That's why there's entire communities dedicated to card churning and finding the cards with the best rewards. There's no loyalty to be had when the sophisticated consumer can just pay their bills with cash.

I'm hoping that FedNow becomes more widely available but my suspicion is that only the big merchants, like Walmart, that have the technical sophistication to incorporate FedNow will benefit from this. Every mom and pop merchant that uses Square or Clover will just defer to the payment processor that will incorporate FedNow and charge their own management fee to these merchants. Then the bank the consumer uses will need to offer a way to use FedNow to pay and my guess is that banks that offer credit cards will resist this for as long as possible.

Just look at the rollout of Zelle. Only a handful of banks offer it. They differ widely in their implementation of it. Different banks offer different limits both in transaction frequency, per transaction limits, maximum transaction limits per month, and more. Then there's a Zelle app for banks that don't actually provide Zelle. On top of that Zelle has its own in-network fraud management that's a separate layer on top of the risk management that each bank and account offers. In practice this makes using Zelle frustrating. I suspect FedNow will work the same way.

Fintechs like Wealthfront, Mercury, Robinhood, Venmo/Paypal, and CashApp will probably be the first to offer it. Newer fintechs probably will too. But bank choice is often a family decision and many people bank where their parents banked. In general financial education in the US is very poor and banks and legacy credit cards know this and will use this knowledge to hobble FedNow.

“Unsophisticated consumers” aren’t using reward cards with annual fees. It’s just the opposite. The ones with the higher incomes are getting rewards for spending. Why wouldn’t higher earners want reward cards? The merchants for the most part aren’t giving cash discounts and they aren’t going to lower prices - they are going to increase their margins.