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March 08th 2021

COVID-19: The Catalyst That Put Payments at the Top of the Agenda for Merchants

At the start of the COVID 19 pandemic, many merchants still viewed payments as a utility. Sure, everyone knew card costs are very high - the second largest cost item after labor for many merchants - but this has been viewed as nothing more than an inevitable cost of doing business by many (even large) merchants. An optimized payments strategy was perhaps seen as "nice to have", rather than an essential business driver.


We are now in a position where no merchant is still treating payments as a utility, and everyone should acknowledge its strategic importance. In fact, payments strategy was, and is one of the  biggest factors in determining success – and even survival – for merchants.

The COVID-19 pandemic has proved to be a huge catalyst for change. In this article, we identify and analyse three main areas in which we’ve seen change in merchant payments during the pandemic: the changing payments mix, the changing supplier base and the changing fee base. All three of these changes present significant challenges for merchants but, with the right expertise, they also provide opportunities for merchants to get ahead of the competition.

1 | The Changing Payments Mix

The major change to the payments mix during the pandemic globally has been the growth of online commerce. Neil McMillan, Director of Political Affairs and Trade at Eurocommerce, notes that “Online retail transactions in Europe have been growing fast for many years…” but that “…COVID has accelerated this trend exponentially, with shops locked down and town centres looking like ghost towns” (CMSPI interview).

This is supported by the numbers; in 2019, only 16% of card payments in the US and 19% in Europe were online (CMSPI estimates). Despite prior growth, at the start of the pandemic online volumes still lagged behind in-store in most industries and a large proportion of merchants had no online presence. Meanwhile, many merchants with online capabilities saw low volumes and did not prioritize optimization in this area.

During the pandemic, online volumes have boomed. There has been nearly 45% YoY growth in the US, which has been mirrored in Europe, with McMillan stating that “many countries saw more than 40% increases” in online food sales. As a result of this boom, many thousands of merchants are now finding out the hard way that payments acceptance is far more complex in the online environment than it is in-store. Online merchants have to address several unique challenges, including far higher rates of card fraud (Nilson Report #1187), a 12% lower approval rate on average (CMSPI estimates), dilemmas over authentication, a diverse array of payment methods to accept, and intermediation of the supply chain by third-party gateways and fraud management providers. On top of this, card fees are higher in online channels – and sometimes substantially so.

It’s about more than just ensuring you can accept online transactions too – omni-channel capabilities allow merchants to seamlessly integrate sales channels, which can be particularly important given the growth of curbside pickup (or buy online/pick up in store – BOPIS) since the start of the pandemic.

What is consistent across all of these areas is that the gap between market-leading merchants and the chasing pack has widened vastly in the past 12 months, and this is putting stress on the productivity of each transaction you accept.

2 | The Changing Supplier Base

2019 saw the completion of a number of very large deals in the payments industry, including FIS’s $35 billion purchase of Worldpay, Fiserv’s $22 billion acquisition of First Data and Global Payments’ $21.5 billion merger with TSYS. In Europe, we saw deals including major European acquirers such as Nets, Nexi, Worldline, Concardis and SIX.

For many merchants, this consolidation has resulted in a change of suppliers and therefore more complexity. Merchants affected by a change in suppliers need to be conscious of the impact it will have on their services, including new invoicing standards, new platforms, new relationship managers and new conflicts of interest within your supply chain. You may also see changing fee structures, and an impact to your approval rates, fraud and the customer experience.

The deal that is perhaps most interesting is the deal that didn’t go ahead. Visa’s planned $5.3 billion purchase of Plaid was abandoned in January 2021 following US DOJ action against the acquisition on the basis it “would have eliminated this competitive threat to its online debit business” (source). Plaid is a credentials scraping company which can link consumer bank accounts with fintech apps such as Robinhood and Venmo. The abandonment of this “anticompetitive” deal (according to Assistant Attorney General Makan Delrahim, source) could be good news for merchants as we could now see Plaid, or other similar solutions, develop an appetite to enter the debit space, potentially allowing merchants and consumers to circumvent card transactions and their high interchange fees.

Another major development during the pandemic has been the growth of Buy Now Pay Later (BNPL), which allows consumers to pay for goods and services in instalments over a pre-agreed period. In the context of global economic uncertainty, a cash flow boost appears to be attractive to consumers, and leading BNPL companies such as Klarna and AfterPay have seen significant revenue and valuation growth in 2020. The time is now for merchants to make a strategic decision around BNPL. That decision needs to be driven by data as, after the initial attraction of new customers, merchants accepting BNPL may be left with higher costs and customers that are loyal to a payment type, rather than their brand.

Overall, the payment supply chain is changing rapidly, and this adds both challenges and opportunities for merchants.

3 | The Changing Fee Base

 Interchange fees levied by Visa and Mastercard cost merchants across the globe tens of billions of dollars every year, have been deemed to be anti-competitive by the UK’s Supreme Court, and are so high that US trade association NACS reports that the card industry can actually earn more profit from fuel retailing than US fuel retailers do.[2]

Unfortunately, the COVID 19 pandemic has only heighted concerns around interchange fees.

In the US, the shift to online will lead to an estimated $1.6 billion of annual interchange fee increases for merchants and $2-3 billion of annual fee increases from reduced debit routing options. Meanwhile, Visa and Mastercard are set to introduce an estimated $889 million of annual interchange fee increases, despite the struggles the merchant community are currently facing. These fee increases appear to be disproportionately skewed towards online channels, which already experience higher card fees and are growing fast.

In Europe, where interchange fees are more strongly regulated, there have been issues with rising scheme fees. In 2021, we have already seen an estimated €100 million of annual scheme fee increases levied by Mastercard alone (source: acquirer communications, CMSPI estimates based on 2019 retail data). However, unregulated interchange fees are also being targeted; Mastercard’s changes to corporate prepaid interchange, for example, are estimated to increase annual acceptance costs for European merchants by €15.5 million (CMSPI estimates). Additionally, our data suggests that the UK’s exit from the European Union could lead to €340 million of higher costs if both Mastercard and Visa reclassify the UK as an ‘inter-regional’ (rather than intra-EEA) market – a decision already announced for some transactions. Finally, EU-wide Strong Customer Authentication (SCA) regulation has led to additional fees for merchants, with schemes announcing fees that apply to every option available to merchants within their SCA strategy. McMillan explains: “we have seen the card schemes seize the opportunity to add new fees for CNP transactions, and on top of that, very high extra charges for SCA transactions – even declined ones, which regrettably SCA has made a rather more common phenomenon.”

Inevitably, all these fee changes are complex, with new fee categories, new volume tiers and industry and country-specific fee changes. Overall, CMSPI estimates these changes will cost merchants across Europe and North America more than one billion dollars annually, but the impact is not uniform and while many merchants are set to suffer significant fee hikes, others may even see net fee decreases. Either way, all merchants need to be aware of the impact these changes will have on their payments costs so they can budget accordingly. The good news is that many of these fee categories are negotiable and proactive merchants can achieve significant monetary savings.


What we have seen during this pandemic is years of change packed into a short space of time.

The merchant community has, quite rightly, been focused on operations from the moment lockdowns hit until now. However, with COVID-19 vaccinations available and the faint promise of normality ahead, merchants are now finally in a position to take stock and develop long-term strategies. At the center of this needs to be a market-leading payments optimization strategy, including online payments acceptance, cash management, a review of supplier relationships and a quantification of the fee impact of upcoming interchange changes.

Given the complexities and the sheer volume of change, the only way merchants can achieve this is through a full, independent audit of their entire payments arrangements.

At CMSPI, we estimate that one in two supplier invoices contain mischarges, up from one in four in the past. Even more fundamental than that, almost every merchant we analyze has clear areas in which there is room for significant optimization in their payments supply chain.