Managing Payments in 2023: Three of the Biggest Trends Affecting Grocery Merchants

With recent network fee increases and volume growth in costlier payment channels, it is more important than ever for grocers to find ways to optimize their costs of payments acceptance¹.

From the introduction of AI, to omnichannel rewards programs, to third-party delivery apps, modern grocery shopping is shifting faster than ever. Here, we review which three payments trends are impacting cost performance at America’s grocers most – and how they can adapt.

The Rise of On-Demand Delivery (ODD)

In 2023, grocers, restaurants, and drug stores alike have been faced with the task of weighing the benefits and drawbacks of partnerships with third party on-demand delivery (ODD) services. While marketing teams may focus on quantifying the potential ecommerce sales uplift, the benefits to order fulfilment, and possible positive spillovers to in-store sales due to a greater customer reach, finance war rooms may be faced with a bleaker reality that these ODD services often come with service fees – as well as higher associated card processing costs.

There are two core reasons for this. Firstly, ODD orders are often paid for by ODD drivers at physical retail locations with commercial cards, which finance teams would correctly associate with premium interchange rates. Figure 1 depicts the published fees associated with a customer using a regulated debit card compared to an ODD shopper using a commercial prepaid debit card.²

The second is that an ODD driver’s customer journey is different to that of someone shopping for themselves. They may be more likely to be indifferent between payment methods and prioritize speed, meaning their behavior at the checkout could challenge merchants’ current setups if they center around encouraging PIN entry to access reduced fees and lower chargeback ratios through optimized debit routing.

These trends combined mean that ODD services may increase payments costs if they cannibalize existing channels, the same customers use a third-party to make the same purchase at a higher cost of acceptance. Grocery transactions often incur lower average processing costs when the customer purchases directly rather than through a third-party service.

Taking all these moving parts into consideration, CMSPI equips merchants with the necessary data analytics to build an optimal strategy around ODD acceptance and improve overall performance.

Online Volumes Continue to Grow

While ODD services and customer preferences are driving merchants to reduce friction in the in-store environment, the boom in online grocery channels shows no sign of slowing down. In fact, U.S. online grocery sales are forecasted to grow at an annual rate of 11.7% over the next five years⁴, with some sources estimating that 70% of consumers will be purchasing food and beverage goods online in 5-7 years’ time.⁵

These changes come just as a cost-controlling tool that has been under grocery merchants’ belts for years – debit optimization – sees significant growth in the online environment because of the U.S. Federal Reserve’s recent clarification of the Durbin amendment requiring dual network routing availability for all card-not-present online debit transactions.⁶ CMSPI estimates that the average grocery merchant sees around 70% of all card payments made via debit cards.

Optimizing debit arrangements is one of the most powerful tools to mitigate rising card acceptance costs. Most major grocers are familiar with this task, but the ever-changing landscape of the debit space requires a dedicated team of experts to remain abreast on complex issues, such as BIN issuance shifts and nuanced unregulated debit interchange categories. As leading experts in the PIN and PINless space, CMSPI continuously works with merchants to optimize transaction-level debit strategies. CMSPI’s data-driven approach and expertise enable merchants to make informed business decisions on some of the most nuanced strategic considerations in the debit space, such as single PIN badged debit cards, which will only become more complex as access to online routing grows.⁷

Fall Fee Changes

Fee hikes taking effect this fall may result in increasing card processing costs for merchants with ecommerce CNP transactions, high-net-worth customer card programs, and commercial transactions.⁸ While grocers have been adapting to the payments challenges of a digital world, these fee changes – coupled with the complexity of ODD transaction environments – require even the most payments-savvy grocers to use all tools at their disposal to mitigate cost. In the immediate term, merchants can forecast the impact of upcoming changes and ensure that each transaction sees the fees applied accurately when they arrive. With this solid foundation of cost visibility merchants can understand the true opportunity of their other cost mitigation tools, from debit optimization, to payment method optionality, to their overarching online delivery strategy

The Wrap Up

The remedy for increasing costs – whether they be from the rise of ODD or upcoming fee changes – always harkens back to two key themes: competition and transparency. The PINless routing clarification has opened a new frontier for merchants to capitalize on competition for debit transaction routing at just the right time. Many grocers may be in a position to consider adjustments to the customer experience on top of back-end routing decisions and reconciliation when using a third-party service. Those equipped with transaction-level data, detailed industry insights, and maximum flexibility in their current setups are set to be the quickest to adapt their business to these three evolving grocery industry trends.