For many people, Black Friday and Cyber Monday mark the start of the holiday shopping season, and the media doesn’t let us forget it: News items focus on how to get the best deals, which card to make purchases on, how to stay within budget this year — and the record-breaking national spending figures. And the hype isn’t for nothing. Americans shopping online alone spent $5.27 billion between Thanksgiving day and Black Friday this year, which is only a small percentage of total hundreds of billions in retail sales during the holidays.
But for those of us in payments, the more interesting story is what’s going on behind the scenes during this time of increased transaction volume.
Summing up interchange
Card networks, card issuers, merchant acquirers, and processors all get paid based on payments volume via a complex structure of interchange and other transaction fees. In short, each player in the payments game receives a cut of the transaction total; these percentages are set by the card network and can range from around 1 to 6 percent. As a result, the massive surge during the holidays makes a big difference when it comes to profits.
It’s the card issuers—typically banks—that make the greatest amount of money on a given transaction’s fees. That process (and how those players interact) is covered in much greater detail here. But with hundreds of billions of dollars in total retail sales, we were curious how much flows through interchange during the holidays—so we crunched some numbers for 2016.
The National Retail Federation (NRF) estimates that Americans will spend $655.8 billion on retail purchases this November and December, excluding cars, gas, and restaurants (as compared to $545.1 billion in January and February of 2016, for example). In 2015, 39 percent of U.S. holiday spending was made with a debit card, 38.2 percent with a credit card, 20.2 percent with cash, and 2.5 percent with check, according to an annual NRF survey. (To make that painfully clear, that’s $16.4 billion spent using checks — for those of us who remember how to write checks, we’ll note that doing so isn’t so seamless as, for example, tapping a mobile phone to a payment terminal.) We’ll base our 2016 estimates on this breakdown. We’ll also need approximations for interchange fees; these can vary widely by transaction type, but tend to hover around 2 percent for credit cards and 0.8 percent for debit cards in the United States.
Given the above assumptions, we can arrive at an estimated $2 billion from debit card interchange fees and $5 billion from credit card fees during the 2016 holiday spending season.
So while much of the world is concerned with the consumer side of holiday spending, billions of dollars are being accrued by the background players involved in processing their transactions.
Fraud, security, and more
So while spending and profits are generally nice, there’s also a surge of less-nice behavior surrounding holiday shopping. One leading provider of authentication and fraud prevention services expects new EMV cards in the U.S. to lead to higher rates of online fraud this holiday season. Because they rely on chips and signatures, EMV cards offer more security in retail stores, which makes it harder for fraudsters to steal customer information there. Fraudsters’ focus has therefore shifted online, to so-called card-not-present (CNP) transactions. With significantly more people doing their holiday shopping online each year (an expected nearly 50 percent of consumers in 2016), there’s ample opportunity for malicious actors to profit from online transactions. Yet another recent study based on hundreds of millions of transactions projects a 43-percent increase in fraud attempts for CNP transactions this year.
That means businesses—and the payments players themselves—need to step up their defenses in lockstep with the profits.
At the end of the day, this (and every) holiday season will see a lot of activity in payments — from dollars earned to dollars pilfered.