Visa and Mastercard currently facilitate greater than three-quarters of all bank card transactions in the USA, at a time when post-pandemic Americans are actually using credit or debit cards for roughly 57% of all transactions (in 2016, it was only 45%). Given the 2 firms’ long-standing dominance within the payments-processing space, what wouldn’t it take to disrupt this duopoly and begin a latest payments Goliath?
I’d prefer to direct your attention to the Goal RedCard. The RedCard is Goal’s umbrella name for its branded card products, which provide users a 5% discount on all purchases at Goal stores and on Goal.com. The RedCard is such a vital KPI for Goal that they break it out in each earnings summary. To wit: Goal did greater than $100 billion in revenue in 2022, 20% of which happened by itself cards:
But what is amazingly interesting and has compelled me to scan every Goal 10Q for years, is specifically the Goal RedCard debit card, on which greater than 11% of Goal’s revenue flows. After being connected, the cardboard simply pulls money directly out of your checking account, which allows Goal to avoid paying the interchange, or swipe, fees which are the bane of all card-accepting merchants.
It must be self-evident why this is essential. Take a look at Goal’s full-year revenue for 2022: they made $107.6 billion in sales and $3.4 billion in pre-tax income. Now imagine if every transaction at a Goal store or at goal.com were made with a bank card—which is currently not the case—at a median fee of two%. This is able to end in $2.2 billion in incremental income if all payments shifted to ACH, which could be 65% more profit!
Goal has impressively shifted 20% of their sales to their very own cards. The one “illogical” a part of that is that to save lots of ~2%, the corporate is… giving up 5%, albeit to the user in the shape of direct savings at Goal, which is the primary profit of the RedCard.
Goal isn’t an outlier here. Most “frequent interaction” or high-frequency billing firms do the identical. Verizon and AT&T, as additional examples, offer you substantial monthly savings for moving your bill-pay off of bank cards and to ACH (or sometimes debit cards, given the lower average fee).
Once you enroll for a RedCard debit card, you link your existing checking account to the cardboard and let Goal pull funds from it. It’s only a “router” to your existing checking account. So effectively, the debit RedCard is an abstraction layer around payments, mapping a point-of-sale (POS) transaction at a Goal store to a subsequent low-cost ACH debit from an existing checking account.
That is harder than it seems. For anyone in credit/debit payments, you would possibly recognize the “verbs” of payments—authorize, capture, settle, void, and credit—not to say things like chargebacks. ACH has fundamentally different “verbs,” and the RedCard is a Rosetta Stone of sorts.
So why is that this model potentially the long run of payments? For one, tools like Plaid have made the connection extraordinarily easy. You don’t need to remember your checking account number or routing code to send a payment. All you might have to do is log-in to your checking account once and also you’re done; it’s a behavior consumers are increasingly used to.
In actual fact, every high-frequency biller—Albertson’s, Netflix, Walmart, Costco, Safeway, Microsoft, Disney, etc.—must be doing this, along with experimenting with pricing and advantages. It’s likely that trillions of dollars of “frequent merchant-consumer interaction payments” shift in the method. Moreover, if firms have a link to a customer’s checking account and a dominant or frequent relationship with them, the extra “fintech” cross-sells which are available to them are countless.
That said, while I feel Goal has been smart to roll this out, paying 5% to save lots of 2% (and justifying it by showing increased engagement, which likely reverses cause and effect and shows sampling bias!) will not be smart. A greater alternative, in my view, could be to supply customers with a one-time profit to make the switch. For example, imagine if Netflix began offering such a profit and commenced offering customers, upon log-in, a $2 one-time discount in the event that they clicked and switched their payment method to direct debit. This is able to provide Netflix with long-term savings of greater than $100 million a yr in North America alone, based on their rough interchange costs.
The “hard” a part of this, not surprisingly, is software. What we want is a “RedCard as a Service” for retailers—“frequent interaction” retailers particularly. This is able to likely sit alongside the present payments stack, or possibly above it, because ideally the one team (on the merchant) that handles dispute resolutions and chargebacks, or refunds, or store credits… doesn’t care in regards to the tender type. All of that’s just abstracted away into whatever tools they already use.
The opposite thing that’s needed is a significantly better onboarding experience. Frankly, it’s shocking that Goal does 20% of its revenue by itself RedCards given how complex they make the onboarding process and the way much information they gather from the patron (see below). Higher software/CX/UX would make the offering rather more compelling.
Luckily, inertia, one among the dual moats that protects a lot of banking, is now decreasing due to improved technology, and consumers are more willing to change up their payments methods. (Rewards, the method by which merchant fees fund customer advantages, with banks in the center, stays a stubborn reason why “RedCard as a Service” hasn’t previously taken off.)
A very magical experience could be what I’d call the “Customer IQ Test,” whereby online customers are asked, “Do you should save $5 without delay by switching your Visa Card ending in 2655 to your Bank of America account ending in 7688? Click Yes to substantiate and also you’re done” while an automatic mapping of their credit/debit card to their checking account is completed within the background. The varied credit bureaus and other players with access to large depositories of bank credentials and PANs (primary account numbers, i.e., credit and debit cards) have already got this ability. One other version of this test might offer customers the chance to prepay $1,000 of spend at a specific company, say Safeway, for under $950. This deal would ensure the client buys all of their groceries at Safeway—so loyalty and fee minimization in a single package. A quasi-subscription—where, for instance, you might be mechanically billed $100 a month by Safeway to get $105 of store credit—could possibly be an alternative choice.
Stepping back, there are still good questions around what number of frequent billers the typical customer can have, what merchants this might make sense for, and more. But basically, the tools to create a RedCard as a Service are either coming or exist already to make this offering easy, fast, and low-friction… and the economic incentive for merchants is MASSIVE.
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