Our data suggests consumers have been limiting their shopping trips, and journeys outside in general, during the pandemic. As a result, fewer transactions are taking place, but Average Transaction Values (ATVs) are rising.
This has particularly been the case in the grocery industry, where ATVs in April 2020 were around 18% higher than our data’s February baseline – with some days reaching nearly 40% higher than the baseline. Other industries to see ATV growth include general retail, apparel, and restaurants. The notable exception is fuel, where plummeting oil prices have reduced ATVs by nearly 20% over two months.
The question is: are rising ATVs a positive for merchants?
Fig 1. Average Transaction Value Growth – U.S. Retail
The Upside of a Rising ATV
There are some benefits of higher ATVs for U.S. merchants. Many of the costs associated with card spending are fixed per transaction: regulated debit card interchange fees ($0.21/0.22 + 0.05%) are predominantly fixed, while processor margins and debit network fees are also typically fixed. In many cases, ATVs are rising without increasing net revenues because all we’re seeing is a smaller volume of larger transactions. Where this is the case, reducing the number of card transactions without changing aggregate dollar spending levels pushes down the average bill.
A $1 billion annual card revenue merchant with 25 million transactions has an ATV of $40. Assuming all transactions are Visa Signature Preferred/Infinite (a common credit card category) with interchange of $0.10 + 2.10%, the merchant would pay $23.5 million in annual card fees. If the ATV increased by 25% to $50 – not unrealistic in the current environment – with the same revenue, then this merchant’s card fees would drop to $23 million. A $500k annual saving in this retail climate would be very welcome. If all transactions instead were regulated debit at $0.22 + 0.05%, this same merchant would see card fees fall from $6 million to $4.9 million – an annual saving of $1.1 million.
The Downside of a Rising ATV
However, there are also reasons to suspect merchants could see increases to net card fees because of reductions in transaction volumes.
In addition to increased ATVs pushing card transaction counts down, but the general decline in economic activity – and therefore retail spend – is also having a clear impact on transaction volumes. This can inadvertently increase merchant costs. Some fixed monthly network fees are unavoidable: the largest of which is Visa’s Fixed Acquirer Network Fee (FANF), a burden on the merchant community for more than eight years now.
As transaction volumes decrease, we would expect transactional costs to also decrease. Unfortunately, fixed monthly network fees are likely to remain the same, meaning the relative size of these fees increases.
Our major concern here is decreased transaction counts jeopardize the performance of bespoke incentive contracts merchants may have in place with processors and local debit networks.
Many large merchants have agreed network incentive deals, often with several networks. These deals are structured in a number of ways, such as with requirements to be top of the merchant’s routing order, for example. However, because network costs are related to the number of transactions rather than the value of transactions, incentives are often volume-based. This means a minimum number of transactions per month often need to be sent via a particular network to trigger the lower fees. Many merchants, particularly the largest ones, also have tiered volume-based pricing with their processors.
These merchants are at risk of missing volume thresholds as transaction numbers decline during the pandemic. This could even be a concern for the grocery industry – where ATV hikes mean transaction volumes have declined in many cases, despite our weekly Retail Payments Review estimates suggesting $25.5 billion of extra revenue during the pandemic (Fig 1). Meanwhile, for many merchants in industries such as fuel, restaurant and apparel – where these deals are also common – transaction counts have been significantly down.
The numbers can be big. Incentive agreements were very complex before the pandemic and have become doubly so. Merchants have to juggle network availability, complex fee structures and often conflicting deals with numerous networks to optimize. Many merchants were close to volume thresholds with several networks before the pandemic and could be at risk of missing them all now.
Consider a merchant that has 100 million debit transactions, and 20 million incentive volume thresholds with five networks. Under normal pre-pandemic trading conditions, it would be hypothetically possible to hit all five-volume thresholds. If volumes fall just 10% to 90 million transactions, this merchant could potentially miss all five. Of course, the merchant may be able to change routing orders to ensure the 20 million threshold is hit with two or three of these networks, but the bottom line is that average costs are liable to increase substantially.
Fig 2. Transaction Volume Changes
When merchants are focused on surviving this difficult period, they need to ensure they’re aware of the indirect effects the pandemic is having on their payments arrangements and costs. Ultimately, whether a merchant is on the upside or the downside of a rising ATV depends on a variety of factors, such as:
- The effectiveness and competitiveness of the merchant’s debit arrangements
- Any incentives the merchant has in place
- Their existing ATV and how that’s changed during the pandemic
- The industry the merchant is operating in, and their debit to credit spending ratio
Analyzing and optimizing debit card arrangements was highly complex to start with, and the pandemic has made it more so. Now is a good time to reassess your card arrangements and see what needs to be changed in order to keep costs to an absolute minimum – both now and into the future.