Low-Value Transactions: A Mobile Payments Dilemma
Low-value payments offer an excellent opportunity for mobile payments to gain adoption among consumers. Earlier this year Canadian Bank RBC partnered with McDonald’s and others to offer mobile NFC debit payments at Canadian McDonald’s locations, and found customers were very receptive to using their phones to make quick low-value purchases.
The parties involved didn’t release the results of the pilot, but they said that it was successful enough that they’re expanding it to new partners, and RBC plans to roll out mobile debit payments to all of its account holders later this year.
It makes sense that customers would be happy to pay with their phones in line at a fast food restaurant from a convenience perspective. But the math doesn’t add up for the merchant and payments providers to encourage mobile payments for such low-value transactions, says Nebo Djurdjevic, CEO of payments solutions provider Cardis International.
“The processing cost per transaction usually comes to 14 or 15 cents on the issuer and acquirer side,” Djurdjevic explains. “For a $50-100 transaction, that 15 cents is pretty insignificant. But for transactions under $10, those 15 cents needed by the [payments] providers to at least break even become a big part of the transaction.”
Fast food restaurants already have thin profit margins, so it makes sense for merchants to prefer that these low-value transactions are made in cash, which they often are in the U.S., Djurdjevic points out.
The answer to this conundrum and make it mobile payments profitable in low-value transactions the rails those transactions travel on for processing need to change, Djurdjevic says. Cardis offers a processing solution that aggregates several low-value transactions into one larger transaction for processing through a payment network, which lowers the processing cost per transaction for the merchant and providers involved. The consumer’s issuer provides the consumer with a specific digital balance to be used for offline transactions (much like a cash transaction). The consumer can use that balance, whether paying with a card or mobile device, at any retailer.
Cardis announced last week a partnership with Spindle to offer their technology in Spindle’s mobile wallet. Spindle also provides payments solutions for merchants, and has a strong presence with fast food retailers and other segments that take a high number of low-value transactions, according to Djurdjevic. The partnership will allow merchants to accept mobile payments while paying a lower processing cost through Cardis’ system, he notes.
It will be interesting to see if Cardis and Spindle can have some success with this proposition for consumers and merchants. We often talk about mobile payments in terms of replacing plastic, but the real opportunity might be in replacing cash. Low-value payments would be a logical place to test that theory.