Boston, MA
February 2005

Impact Of Changing Payment Landscape on Banks


Previous Mercator Advisory Group research, “Processors React to Expanding Merchant Needs” identified new merchant activities that have driven dramatic change at the Point-of-Sale (POS) and documented the impact of this change on payment processors.  This report incorporates a subset of that same information but also evaluates how this dramatic change at the POS impacts the decisions being made in bank operations and analyzes the impact these new merchant demands will have on banks in the long term. 

The range of payment instruments available to consumers today is staggering: cash, checks, e-checks, credit cards, debit cards, and Automated Clear House (ACH) network solutions as well as online banking which is growing at more than 35% a year across all market segments including basic online access, Electronic Billing Presentment and Payment and Account Aggregation.  Merchants, once driven solely by consumer choice, are now taking proactive steps designed to increase profitability.

Traditional payment instruments continue to dominate the industry, but there has been a significant shift in consumer preference among even these.  The increasing popularity of debit cards remains strong.  In 2003, there were 15.6 billion debit card transactions compared with 8.3 billion in 2000.  This is an annual growth rate of 23.5%.  By year-end 2004, it is estimated that US consumers had conducted an estimated $18.6 billion debit card transactions, representing over 50% of all card-based transactions.

Evaluating the exact nature of a payment system depends very much on the perspective, which changes between the merchant, intermediary, and banks, all of which have a very different set of requirements.  Therefore, each participant ranks payment systems differently.  From the merchant’s perspective, the evaluation criteria are simple to identify even if the rating assigned to a payment instrument might vary dramatically between merchants.

The basic evaluation of each payment instrument included in this report was also included in the previous report entitled, “Processors React To Expanding Merchant Needs” but has been expanded to include the analysis of a greater number of ACH transaction types.  The analysis of how the payment types impact the merchant and payment processor remain because Mercator Advisory Group believes banks will find this analysis important even if they do not have a significant merchant acquiring operation.  Breakdowns of the most popular, the fastest growing and several new entrants are then viewed relative to both the merchant that will accept the instrument and from the perspective of the banks.

Tim Sloane, Director of the Debit Service for Mercator Advisory Group and the author of the report comments, “The coming together of forces in the payments arena suggests a need for banks to take a fresh look at their payments strategy.  Bank merchant acquisition strategies need to be better attuned to a broader set of merchant needs, including loyalty solutions, prepaid store cards, POSA and check conversion.  Consumer preference for multiple payment solutions is well documented.  Banks that are overly protective of existing revenue streams are myopic, since they have an opportunity to establish programs that align merchant needs with consumer banking styles.”

One of Seven (7) Exhibits included in this report

This report looks at payment choices and evaluates these choices while looking at merchant requirements driving change in the payments industry.  In addition to the overall impact on merchants and banks for each payment choice is discussed. 

The report is 36 pages and contains 7 exhibits.

Members of Mercator Advisory Group have access to this report as well as the upcoming research for the year ahead, presentations, analyst access and other membership benefits. Please visit us online at

For more information call Mercator Advisory Group’s main line: 508-845-5400 or send email to