The evolution of consumer payments

Since the beginning of time, people have used some form of payment to purchase goods and services. From the creation of the Mesopotamian Shekel around 2,150 BC, society has always endeavored to design payment methods with fair and equitable values. That is the foundation of a free market economy.

The evolution of digital payment by debit and credit cards is no exception. For many years, customer traffic within physical bank branches has declined as technology has provided consumers with improved access to their finances. In essence, digital payment has significantly reduced the amount of cash used by the average Arkansan.

While the fundamental currency remains the same, the form of the payment has evolved due to consumer demand. This was readily evident during the pandemic, as evidenced by data from the Federal Reserve.

The ability to provide consumers with the digital payment options of debit cards, credit cards, or both, was developed through investments made by the financial services sector. When a debit or credit card is used by a consumer, there is a small transaction cost referred to as “interchange” which is the processing expense between the retail and customer banks. This interchange serves to assist in the development of the digital payment system, manage the technology, and support further evolution to mitigate customer fraud.

One of the more well-known evolutions in the fraud prevention and security realm was the creation of the digital EMV chip card, which significantly reduced consumer fraud. Continued investment in innovation is necessary for consumer protection from criminal activity.

Recently, there has been legislation proposed to reduce the interchange on digital payments under the guise that it is either unnecessary or unfair to retail businesses. This is simply not true nor accurate. As mentioned above, the expense for the development, operation, maintenance, and innovation was borne by the financial sector, not the retailers.

Second, the interchange on most digital payment systems has not materially changed since it was declared reasonable in 2011 upon the passage of the Dodd-Frank Act. The higher volume reported by the Federal Reserve is due to increased consumer card use and considerably higher merchant sales, not an increase in the interchange rate.

Third, Federal Reserve research indicates there is no evidence that any interchange reduction will reduce the price of goods nor benefit the consumer. In fact, many retailers pass the interchange on to the consumer at the point of sale.

Finally, retailers and small businesses actually benefit from the digital payment methods of debit and credit cards. There are significant advantages to be gained in receiving immediate payment with no fraud risk, not having to handle physical cash, no worry about checks clearing nor being returned, speeding up the transaction, and enhancing the customer experience.

Not unlike our Founders who minted the first United States coin, our society will continue to develop and adapt payment systems into the future. However, it is important to fully understand the importance of innovation and the expense associated therewith.

Fraud takes many forms and whether it is a forged check, counterfeit bill, or fraudulent credit card transaction, the impact to the consumer is the same. Arkansans have readily adopted digital payments. Interchange should not be about profitability, but providing consumers the best digital payment system and fraud protection they deserve.

Editor’s note: Brad Chambless is the president and CEO of Farmers and Merchants Bank and The Bank of Fayetteville. He was recently elected as chairman of the Arkansas Bankers Association. The opinions expressed are those of the author.