2020 was a transformational year for the payments landscape. Payment channels evolved to meet customer demand, and evolving threats of the COVID-19 virus. 

Customers across the age spectrum quickly adapted to digital, contactless payment channels as social distancing rules were imposed for public safety. 

According to a JP Morgan study released in Dec. 2020, "54 percent of consumers agreed that they use digital banking tools more due to the pandemic today than they did last year."

A need and expectation for real-time payments also surfaced as financially-strained people sought access to their funds with more urgency. 

"The pandemic accelerated a lot of trends that were catching traction the year prior," Forrester analyst Lily Varon told sister publication Payments Dive. "Evolution from both the merchant and customer side picked up pace to evolve with changing market conditions."

Below are the top six payment trends that gained traction in 2020 and are set to evolve into mainstream payment models in 2021.

1. Deferred payments or buy now, pay later

Digitally deferred payments have been gaining popularity among users since 2019. In 2020, when finances were especially tight, customers pivoted to the buy now, pay later payment methods. 

"As people struggled through the pandemic, buy now, pay later became a huge trend, embedding that within the purchasing at checkout," Brandon Rembe, chief product officer at Envestnet-Yodlee, told Payments Dive. "BNPL is allowing companies to service those types of clients that do want to pay over time." 

There has been a huge change in the category and also just a general desire to remove friction around payments. Customers want a frictionless payment channel, while businesses want to hold on to their customer base and reduce transaction costs, Rembe said. 

According to a Forrester webinar, nearly "36% of US online adults are interested in, currently use, or have used a 'buy now, pay later' service for a large purchase."

Merchant adoption for such services has also increased as they are trying to meet customer demands for BNPL payment offering. 

"In Jan 2020, 26% of the 100 U.S. retailers offered a deferred payment method," the Forrester webinar stated. "By December, that number had increased to 46%."

Traditional retailers Macy's, Gap and Neiman Marcus have started offering BNPL to credit card averse customers. "Many customers are using these services for better budgeting reasons," Varon said. "You can buy more and spread it across a longer period of time."

BNPL companies including Klarna, Affirm, Uplift and Splitit experienced significant growth in 2020 as customers' purchasing power dipped due to the pandemic. Splitit saw its customer base double while experiencing a 300% increase in revenue during 2020. Splitit also introduced BNPL services to the professional services sector last year, adding the option for customers to pay for professional services — such as accounting, dental and legal services — in installments. 

BNPL services have been gaining momentum since before the pandemic, but the increased use of e-commerce last year fast-tracked customer adoption towards installment payments, Brad Paterson, CEO of Splitit, told Payments Dive.

Affirm went public at the start of 2021 to lean into its growth, and even released an Affirm card for customers to have more options for BNPL services. Nearly 13% of U.S. BNPL customers had used Affirm in Q42020, compared to 7% in Q12020. 

Venture capital funding for BNPL services also skyrocketed in the past two years as this payment channel gained customers. According to Forrester research, VC funding for BNPL services jumped to $1.9 billion in 2020 from $1.8 billion in 2019, and up from $302 million in 2018. 

While younger generations who are credit card averse gravitated to BNPL services, the adoption of this payment channel appeals across the age spectrum.

"Our data sort of shows that interest certainly is concentrated on the younger groups," Varon said. "But actually, usages are consistent across age groups."

Established payment giants Visa, Mastercard and PayPal (Pay in 4) have also started offering BNPL services to meet evolving consumer demand.

While BNPL services are gaining popularity and traction among consumers and businesses alike, they come with strings attached. Many people don't completely understand the BNPL service offering and get bogged down with hidden fees when they miss a payment. Returning a product bought through such payment options is also typically more difficult for a consumer.

According to a recent survey in the U.K., nearly 20% of shoppers who opted for BNPL services for Christmas shopping are struggling to make payments on time. Such offerings can lead people to outspend their budgets and hurt their credit ratings when they miss payments.

In the U.S., BNPL has been flying under the radar as it's still in its early adoption stages. BNPL could be subject to scrutiny from the Federal Trade Commission and Consumer Financial Protection Bureau, which oversee lending practices for Unfair, Deceptive or Abusive Acts or Practices, if consumers are adversely affected by the payment offerings. 

2. Digital payments

According to virology studies, the COVID-19 virus can survive on banknotes for up to 28 days, compelling consumers to pivot to digital payment channels to avoid contracting and spreading the virus.

Consumers adapted using digital payment channels such as tap-to-pay, e-commerce and digital wallet payments to avoid contact while making a payment. Mobile payments and digital wallets were two of the most popular payment types as they eclipsed cash transactions in 2020, according to a FIS report.

"Mobile wallet transaction counts doubled in the months following March 2020," David Shipper, an Aite analyst, told Payments Dive. 

A Fiserv research study stated nearly 24% of respondents believed mobile payments were the safest to prevent the spread of the virus.

"Card issuers want to be 'top of the mobile wallet,'" Shipper said. "They are encouraging cardholders to add their card to their mobile wallet."

There are many benefits for card issuers to offer digital cards and digital wallets. Greater security leads to higher usage, increasing the likelihood the cardholder will carry a credit card balance, according to Aite research.

Digital wallet users are expected to exceed 4.4 billion globally by 2025, up from 2.6 billion in 2020, Juniper research stated. The total amount spent through digital wallets is also expected to nearly double to $10 trillion annually by 2025 from $5.5 trillion over the time period.

In the U.S., nearly $131.4 billion was spent through mobile payments, with 86.9 million users in 2020, up about 20% in dollar value from $110.5 billion, with 71.5 million users in 2019, according to eMarketer estimates from Insider Intelligence. 

"Mobile wallet active cards are still less than 10% of total cards, so there is a lot of room to grow," Shipper said. "There will be continued growth in mobile wallet payments and digital card issuance."

Although on the rise, mobile transactions are prone to be targets of cyberattacks. Digital wallet transactions saw a 33% increase year over year in fraud attempts, while the average amount stolen from such transactions up by 9% year over year as well, according to a recent report from the digital fraud prevention company Sift. Consumer complaints to the Consumer Financial Protection Bureau also rose by 59% year over year regarding mobile and digital currency transactions. 

Companies such as PayPal came out with QR codes to provide other digital payment channels for customers and merchants alike. PayPal and Venmo's QR codes are accepted at over 600,000 retail locations, Jim Magats, senior vice president of omni payments at PayPal, told Payments Dive. 

"PayPal signed 29 large enterprises like CVS, Nike, Macy's and Foot Locker to its QR payment channel in 2020," Magats said. "We are seeing a 19% increase [year-over-year] in total payments volume for consumers who use our QR codes."

According to a McAfee report, rising mobile and QR code-based payments are not as safe as they might seem. QR codes provide scammers with a new avenue for disguising themselves as legitimate businesses and spreading malicious links.

Sound-based payment channels are picking up traction as they can process payments from farther away, with minimal new hardware and software solutions. LISNR, a Visa-backed tech startup that uses ultrasound technology for mobile authentication and payments, experienced a near 300% increase in transaction volume quarter over quarter during the pandemic. 

3. Rise of e-commerce and embedded payments

U.S. retail e-commerce sales picked up during the lockdown as more people shopped online. In 2020, $794.5 billion was spent through e-commerce channels, surging 32.4% annually over 2019. E-commerce sales made up 14.4% of all sales in the U.S. in 2020, compared to 11% in 2019. 

Amid store closures, retailers ramped up their e-commerce presence, including small businesses that hadn't sold online before. According to digital payments company Square, the share of businesses accepting online payments increased by 13.2% from February to July 2020. 

Even in sectors that hadn't made much use of the channel, such as in sales of groceries and beverages, purchases grew 74% year over year in 2020, a rate more than triple that of 2019, an Insider Intelligence report stated. 

E-commerce adoption climbed across the age spectrum. Prior to the pandemic, older customers previously shopped online at much lower rates than younger adults. But seniors, who are most at risk from the virus, turned to digital avenues to reduce the health risk. 

"We've kind of always felt that consumers were pretty slow at adopting new banking and payment habits," Sarah Grotta, Director of Debit and Alternative Products Advisory Service at Mercator Advisory Group, said during a webinar. "Yet, we really saw that consumers, customers and members will actually change their habits pretty quickly, out of necessity, or sometimes, when the right incentive is put in front of them."

Just 16% of internet users over 65 shopped online at least once a week in May 2019, "but 43% of that demographic reported doing so more frequently than in the past in 2020," Insider Intelligence stated. 

While in-store retail is bound to pick up as the pandemic subsides, the events of 2020 accelerated the shift to e-commerce by about two years, according to an Insider Intelligence report.

"U.S. retail e-commerce sales will account for $1 in $5 spent on retail by 2024," the report stated. "They'll account for $1.205 trillion, as online shopping experiences improve, retail stores close at record rates, and customers maintain habits forged in 2020 and 2021."

4. Real-time payments and automated clearing house transactions

When finances were especially tight across the globe, consumers wanted access to their funds as soon as possible. With the rise of peer-to-peer payments, businesses also started expecting transfers to be more efficient and as quick as PayPal or CashApp transfers. 

According to a JP Morgan study, gig economy workers, insurance claimants and small and mid-sized businesses expect to receive and access their funds immediately. 

More than 70.3 billion real-time payment transactions were processed globally in 2020, a surge of 41% compared to the previous year, according to an ACI Worldwide study. With nearly 2 billion real-time payment transactions processed in 2020, North America is predicted to be the highest growth region by 2025, the study stated.

Customers are pivoting to peer-to-peer payments apps for instant transactions as many financial institutions don't have the infrastructure to support real-time payments. According to a Mercatory survey, 70% of bank customers have used a peer-to-peer payments service at least once in the past year, Grotta said.

"You take a look at the number of money movement transactions that you as a financial institution might not be participating in because your members have to go somewhere else," Grotta said. "It really does make you [financial institutions] think about this, this could be a pretty important solution to offer."

Nearly 60% of the U.S. market expects real-time payments, according to the JP Morgan study. Many countries like the U.K. have been offering real-time payments since 2008, but "in the U.S. is the degree of complexity resulting from a far greater number of banks than in other countries," the study stated. 

"In the U.S., we really didn't have a need for real-time payments for a long time," Grotta said. "But that is starting to change, as people are expecting more and financial institutions see an advantage to make payments faster."

The existing clearinghouses are owned by the largest financial institutions in the country like Wells Fargo, Bank of America and CitiBank, discouraging smaller financial institutions from joining the network because they don't want to use a competitor's services and pay for it, Grotta said. 

The Federal Reserve Bank has started the FedNow project, which will bring all financial institutions into a real-time payment network. Nearly 200 financial institutions, including Visa, Mastercard and Temenos, have joined the project to help the Fed create a system that works with all financial institutions across the country, 365 days a year to provide real-time payments.

Automated clearing house network payments also saw an uptick in 2020, as credit and debit transactions picked up due to online shopping. Many business-to-business payments also pivoted to automated clearing house payments, as it usually costs less than $1 per transaction, "making it an appealing option, particularly for high-value transfers," an Insider Intelligence report stated. 

Automated clearing house was created to digitally replace bank checks, but has swelled in transactions due to quick processing time and low costs associated with it. Despite slow economic activity, automated clearing house payments smashed records in 2020, increasing by 8.2% to 28.6 billion transactions, according to Nacha.

5. Evolution of peer-to-peer payments

Peer-to-peer payments started gaining popularity after the 2008 financial crisis, picking up significant momentum during the 2020 pandemic as well. What started as an efficient, easy and quick method to transfer funds and split pizza bills among peers has transformed into a multi-facet platform, serving almost as a bank. 

Venmo, Zelle, and Square Cash apps have grown in popularity, with volume hitting $393.9 billion on the back of massive user growth in 2020, an Insider Intelligence report stated. 

"We saw a 24% increase of active accounts, almost 73 million net new accounts added, and nearly 41 payment transactions per account, all leading up to $936 billion in total payment volume in 2020," PayPal's Magats said. 

Prior to the pandemic, mobile peer-to-peer growth had been decelerating as use among younger customers — its top demographic — became widespread. But with the pandemic, volume reached $393.9 billion in 2020, up 5% from $375.1 in 2019, and is expected to hit $538.7 by the end of 2022. The number of users also increased from 79 million in 2019 to 82 million in 2020 and is expected to hit 100 million by the end of 2024. 

Gains were propelled by older customers in particular, who flocked to the services to replace cash and checks. Many payment platforms provided additional services like investment and trading, cryptocurrency transactions and debit card offerings to retain customers. 

"Most digital peer-to-peer apps are looking for ways to generate revenue and are offering bank-like products and services to drive revenue," Talie Baker, a senior analyst at Aite said. "PayPal, Venmo, and CashApp have all ventured into crypto trading as a way to generate revenue."

PayPal believes digital currencies, central bank digital currencies and the collaboration with central banks and regulators will open new ways to exchange value and power global commerce and financial services. It has also helped in adding and retaining customers on the platform. 

"Customers who have purchased crypto have been logging into PayPal at roughly twice their login frequency prior to purchasing crypto," Magats added. 

Peer-to-peer payments also helped serve small- and mid-sized businesses during the pandemic, as they were looking for alternative contactless methods of accepting payments. PayPal and Venmo launched QR code payment methods for in-store payments, which helped many small- and mid-sized businesses to accept contactless payments with low hardware integration costs. 

"We processed over $20 billion of payment volume, with almost 10 million consumers using PayPal in store," Magats said. "Our products and services have never been more relevant and important for our customers than they are today."

PayPal has 29 million merchant accounts on its platform that use its QR code or peer-to-peer payment channels for accepting payments. 

Peer-to-peer payments are set to evolve even further in the coming years, according to Baker. 

"I think that digital peer-to-peer payment methods are becoming more common for micro-businesses," Baker said. "And the play [trading and crypto investing] is most likely to be able to generate revenue from the app and secondarily to drive more consumer engagement."

6. Cross-border payments

In a globalized economy, a need for faster, cheaper and more efficient cross-border transactions is slowly becoming a necessity. Cross-border payments were growing steadily amid rising globalization and easier cross-border shopping prior to the pandemic. 

According to a McKinsey & Company report, cross-border payment flows totaled $130 trillion in 2019, generating payments revenue of nearly $224 million. In 2020, trade and travel halted, directly impacting cross-border transactions. 

Visa's cross-border volume declined 29% in Q3 2020, after being up by 7% in Q3 2019, according to an Insider Intelligence report. Mastercard's cross-border volume sank 36%, compared with an approximate 16% increase in Q3 2019.

"We did see in 2020, a decline in payments activity, but in the fourth quarter of 2020 we already saw that volume bouncing back," Erika Baumann, an analyst at Aite, said. "We expect the volumes are going to continue to increase in 2021 and 2022."

Reducing cross-border payments can be attributed to an old correspondent banking model that has been in place for over 30 years. It has a "multistep process with inherent issues that create friction in the process," Aite research stated. 

"Businesses that are making cross border payments are getting frustrated with the friction and the cross border-payments process, and are looking for some alternatives to remove some of those pain points," Baumann said.

In the current antiquated correspondent banking model, a business sends payment instructions to its bank. The bank, which likely does not have a presence in the country of the recipient, will send that payment to a 'correspondent bank.' That bank will send it to another correspondent bank that will convert the payment into the recipient's currency. 

A lot of innovation is happening in the cross-border payment landscape because traditional correspondent payment channels are clunky and can take days to process a transaction with comparatively high costs. 

Emerging markets usually get left out due to the lack of infrastructure required for correspondent banking models. Still, correspondent banks continue to shrink. 

"If you are in an emerging region, (such banks tend) to be high risk and low profit because you just don't have the same volume of payments," Baumann said. "And secondly, because the technology exists to make these payments easier."

Fintech companies and better technological models can help provide a better payment channel and reach emerging markets, Baumann said. This will create a space in the market that can lead to a rise in payment-as-a-service providers, Baumann said. 

Visa, Mastercard, MoneyGram and others are coming out with services to better facilitate cross-border payments. MoneyGram recently launched a service to transfer money to a digital wallet from almost any place in the world, and now, the company will connect customers and vendors from around the world as well.

Visa also launched peer-to-peer and business-to-business cross-border payment channels to better facilitate faster payments, and recently expanded that network with the acquisition of EarthPort. 

"Bigger financial institutions that have the means are building their own cross-border payment channels might try to do so," Baumann said. "While smaller FIs are looking to partner with fintech because it's comparatively inexpensive."

The very convenience that makes buy now, pay later financing an attractive option to consumers may come with risks to providers, according to a recent report from Fitch Ratings.

Among those risks is "adverse borrower selection" in the payment method. As Fitch analysts said in the report, "[B]orrowers attracted to the ability to split even small-value purchases into several monthly repayments may have only limited additional financial headroom in case of adverse life events."

Because buy now, pay later providers rarely report statistics to credit bureaus, there is little visibility into consumers' BNPL borrowings. That means those providing financing to consumers "could underestimate a borrower's debt level when underwriting new debt," Fitch analysts said in the report, which was emailed to Retail Dive.

BNPL providers are rushing to the U.S. market as brands and retailers build the option into shopping experiences. The domestic market is still seen as relatively new by international players, making it a frontier for potential growth. Just this week, Square announced plans to buy the Australian BNPL player Afterpay for $29 billion.

But with opportunities come risks, heightened by the fact that many product areas of BNPL are relatively unregulated compared to other forms of consumer credit. And while the costs tend to be low, the underwriting process is typically "very fast" and based on "'soft' credit checks" rather than more thorough vetting required in other forms of credit, Fitch analysts said. 

The overall risk embedded in the market is difficult to discern, in part because even measuring the size of the market in the U.S. is difficult and not straight forward, according to Fitch. Moreover, the performance of the debt itself — including most importantly how often it is repaid — is an "opaque" matter, the analysts said. 

The Fitch report cited survey data showing that 31% of U.S. respondents have made a late payment or incurred a late fee using BNPL methods. But, the analysts added, "there have not been any reports of significant performance issues related to actual BNPL credit to date, despite the above survey results." 

They also said that most BNPL providers "have not set aside large provisions for losses and report minimal bad debt."

And then there are the risks built in to the BNPL offer itself. The Fitch report noted that those attracted to the small payments and ease of borrowing may be those least financially able to make payments if they suffer a job loss or other disruption in their economic life.

Further, the Fitch analysts point to younger customers — often the target consumer of BNPL options and marketing campaigns — as typically "fac[ing] greater employment uncertainty in an economic downturn." This, they added, "may be exacerbated by a focus on impulse purchases and glamourizing the need to follow fast-changing trends."

In one of its latest moves to capitalize on the spending of its broad customer base, Walmart is expanding its offerings beyond its core business by building a fintech startup. 

The Bentonville, Arkansas-based retail giant in January announced plans to create a fintech startup with Ribbit Capital — a company with a history of backing several players in the space, including Robinhood, Affirm and Credit Karma. 

Walmart will own a majority of the startup but didn't give specific details on the deal. However, the company's expansion to other non-retail categories like veterinary and human health clinics and its plan to gain partial ownership of social media app TikTok suggest attempts to grow outside retail.  

"I think it's a natural complement to their retail strategy," said Greg McBride, Bankrate's chief financial analyst. "Extending their reach allows them to have even greater share when it comes to consumers and their money, not just how and where they spend it, but how and where they manage it."

The retailer has the potential to be a big player as soon as it enters the fintech industry because of its massive scale, McBride said. Unlike typical fintech startups, Walmart already has capital, millions of loyal customers and over 2.2 million associates, according to the company website.

Though fintech and banking might seem beyond Walmart's scope, this isn't the first time the retailer sought to break into financial services.

Walmart unsuccessfully pursued a banking license in 2005 through an Industrial Loan Company charter. Walmart ended up withdrawing the charter application two years after receiving opposition from a coalition of bankers and other credit institutions.

"I think some things that are unique about what they're doing right now is that they've partnered with a private equity or venture capital firm to get this going, and it's a firm that has experience in the fintech arena," McBride said. "It also is going to be focused on fintechs, and not necessarily an in-store presence, [which] had been the concern of banks 15 years ago."

The startup's board includes John Furner, president and CEO of Walmart U.S., Walmart Executive Vice President and CFO Brett Biggs and Meyer Malka, managing partner of Ribbit Capital, according to the release.

A history of retailers in lending 

Retailers have a long history of offering financial services to their customers through lending, said Ken-Hou Lin, associate professor of sociology at the University of Texas at Austin and co-author of "Divested: Inequality in the Age of Finance."

Lending was a primary way for retailers "to sell more expensive items such as pianos or appliances," he told Retail Dive through emailed comments. "However, these companies did not plan to profit from lending. They hoped the consumers would pay off their debt as soon as possible."

Financial services exist in retail today through banking products like loans, credit cards and checking accounts, Lin said. Collecting relevant data is a more recent advantage in providing these services in retail stores.

"By following the transaction records of their consumers, they can do targeted advertisement and have a better sense of consumption preferences," Lin said. 

Seeking banking charters could now be easier for Walmart and other corporate giants, after the Federal Deposit Insurance Corporation approved a final rule that made the path smoother for non-banking institutions to become lenders and redefined what a bank is. The decision came as several nonbanks like Japanese e-commerce company Rakuten pursued industrial loan company charters in 2019.

Lawmakers in recent years have opposed the idea of commercial companies getting charters. Sen. John Kennedy, R-LA, introduced a bill in November 2019 that would "close loopholes" and prevent nonfinancial companies from receiving bank charters.

"If they're allowed to handle your banking services, they're going to turn into continents," he said at that time. "The Federal Reserve exists for a reason. The Rakutens and the Googles of the world shouldn't be able to circumvent the Fed."

Growth opportunities

Despite restrictions, Walmart has already made moves that gave the company some knowledge on how its consumers react to financial services. Walmart has formed partnerships with Green Dot to offer prepaid debit cards called MoneyCard and Affirm to offer installment payment options. Walmart MoneyCenters also allow customers to cash in checks and send money abroad. 

In announcing the new startup, Walmart said it intends to engage in more partnerships and acquisitions with other fintech firms to grow the startup. 

The retailer also said it plans to fill its startup's management team with fintech leaders and add independent industry experts to the board.

While Walmart has yet to outline the startup's blueprint, bringing its financial services in-house means the retailer has more control and profit potential, said Charlie O'Shea, Moody's lead analyst for Walmart.   

The goal of Walmart may be to provide a solution to its core constituency who have been hit the hardest by the pandemic's economic fallout, said McBride. 

"A lot of lower-income households are unbanked or underbanked, and they don't oftentimes trust traditional financial brands," he said. "Walmart has a lot of brand loyalty."

Alibaba has built a similar system in Asia where it has merged its retail business with financial services. And in January, Walgreens announced it is launching credit cards and prepaid debit cards in the second half of 2021 as part of an extensive push to expand its financial service offerings.  

"In Walmart's case, they don't offer any third-party leasing products in the stores in either the Walmart Supercenters or the Sam's Club stores, and that's a potential opportunity going forward," O'Shea said. "That's something that several retailers are doing, with reasonable degrees of success, because you take care of your customer, you preserve that relationship."

The startup could go in plenty of directions, said O'Shea. The challenge for Walmart is which direction to take first and how fast it wants to implement plans, he said.

O'Shea said he expects the company to be nimble but deliberate in its strategic planning. The initial financial service offering of the startup might even evolve in the next few years.     

"This company does not make rash decisions," he said. "It's been on management's mind for a long time. They found a partner, and now they're going to execute."

Users of PayPal's Venmo payments app will be able to make purchases from Amazon.com starting in 2022 on the e-commerce giant's website and mobile app, according to PayPal. 

The partnership, announced in November during PayPal's quarterly earnings report, is a high-profile win for Venmo in the increasingly competitive payments market.

Speaking to Wall Street analysts on an earnings conference call, PayPal Chief Executive Dan Schulman argued that the Amazon alliance will have both short- and long-term benefits for PayPal. Details about the alliance such as when it will start are still being worked out by Amazon and PayPal, according to PayPal.

"We couldn't be more pleased to be able to team with Amazon," Schulman said, noting Amazon's significant U.S. market. The new tie "increases the addressable market for Pay with Venmo. And Pay with Venmo is one of the key revenue drivers for Venmo going forward," Schulman said. "I think about the journey that Venmo has been on — this obviously is a punctuation point for sure."

EBay acquired PayPal at the dawn of the internet era in 2002. The two parted ways in 2015, splitting into two separate companies though they honored an existing agreement that PayPal would continue to be eBay's primary payments processor. Three years later, PayPal and eBay announced that they would not renew their agreement, which has expired.

The agreement with eBay had been holding PayPal's growth potential back, Schulman said during the call.

"This is obviously a very significant moment in our Venmo monetization efforts and marks the beginning of an exciting journey with Amazon, now that we are no longer constrained by the contractual obligations of the eBay operating agreement," he said.

PayPal has also scored some other high-profile wins. Retailer Walmart, for example, now offers PayPal for both its grocery and marketplace. Fundraising site GoFundMe also accepts PayPal. Oil companies Valero and Phillips 66 added PayPal's QR codes to thousands of gas stations.

He also noted that PayPal's buy now, pay later service has been adopted in the U.S., Germany, France, the U.K. and Australia. The company will expand buy now, pay later to Italy and Spain in the fourth quarter.

In its third quarter report, PayPal said net income rose to $1.09 billion for the three months ended Sept. 30, from $1.02 billion in 2020. Revenue rose over 13% to $6.18 billion. Still, the company's stock tumbled after PayPal issued a fourth quarter guidance that fell well short of analysts' forecasts.

Schulman also addressed media reports that claimed that PayPal was interested in buying Pinterest.

"The truth is we review hundreds of potential acquisitions every single year and we put every single one of them through a very strict set of strategic financial integration filters," he said. "We've never done a large acquisition so far," Schulman said on the call. "There are very few that we look at, but we look at a couple every year, and they have a much higher hurdle rate than our smaller acquisitions."

The American marketplace is becoming more crowded with companies offering buy now, pay later, as non-U.S. companies race to attract American consumers newly interested in a financing option already popular in other parts of the world.

Zip Co, a Sydney, Australia-based BNPL company with a market capitalization of $5 billion, acquired New York-based Quadpay last year, and sees the U.S. market as ripe for the picking, though it's playing catch up with Melbourne-based Australian peer, Afterpay. They've been drawn to the U.S. because consumers are increasingly using BNPL in lieu of credit cards. Zip aims to replicate its Australian success in the in the U.S., where it's the No. 2 player nationally behind Afterpay.

"Australia's almost the playbook of what we're going to deliver globally," Larry Diamond, co-founder and CEO of Zip, told sister publication Payments Dive. "Right now in America, we have a 'pay in four' [offering] that's doing very very well, but if you look at Australia, we do short- and long-duration installments [and] we'll be taking that globally."

Zip is catching a BNPL wave early, as the U.S. is still largely seen as a nascent market for BNPL entrepreneurs. Precursors of BNPL have been around for hundreds of years and layaway, a purchase agreement whereby the buyer pays for an item over time and doesn't receive it until it's fully paid off, became popular during the Great Depression. Layaway gradually phased out, as credit cards took hold in the 1980s. But with the rise of digital payments after 2000, BNPL emerged as a payment method of choice for a growing number of consumers. 

Klarna, an early Swedish mover in this space, was founded in 2005 and expanded to other European markets in the years that followed, reaching the U.K. in 2014. In the U.S., Bill Me Later was an early company in the arena, founded in 2000, and acquired by PayPal (which was then part of eBay) in 2008. Affirm, based in San Francisco, was founded 12 years later, and the concept took off in the past couple of years.

An analysis of transaction data from payment processor FIS Worldpay shows buy now, pay later transactions made up 10% of Australian e-commerce payments in 2020. By contrast, BNPL adoption in North America is comparatively small: In 2020 those transactions made up a mere 1.6% of e-commerce purchases, but FIS Worldpay projects that BNPL transactions will jump to 4.5 % of e-commerce transactions in the U.S. by 2024. 

Of course, Zip isn't the only foreign player looking to grow market share in the U.S. Klarna, which reported global gross merchandise volume of $53 billion in 2020, said the U.S. is its fastest growing market behind Sweden and Germany (it didn't provide U.S. figures). Afterpay, which launched in the U.S, in 2018, nearly tripled sales to $3.3 billion for the first half of 2021, compared to 2020, with the U.S. market forming 43% of sales. For the first three months of 2021, Zip reported that its U.S. quarterly transaction volume through Quadpay in the U.S. was $591 million, or 48% of its global transaction volume.

Standing out

Non-U.S. BNPL firms face competition from U.S. firms Affirm and PayPal, as well as BNPL services offered through banks like Citizens Bank and Ally Financial. 

BNPL providers typically generate revenue through merchant fees that amount to a cut of transactions. Rates vary by provider and range from 2% to 8%.

Quadpay, like many BNPL providers, doesn't do a deep credit check, but says its selling points include the ease of underwriting new customers and consumers' ability to use Quadpay, either through merchants with which it partners, or with any merchant through the Quadpay app. The ability to use Quadpay for purchase categories that move beyond traditional retail is part of an industry-wide BNPL shift into professional categories, including areas like healthcare, legal and accounting services.

"Being able to serve the consumer in that way where they can use Quadpay for all these other things beyond discretionary retail, is really helping the network," said Adam Ezra, CEO of Quadpay. 

Quadpay's underwriting method, Ezra said, doesn't touch a customer's credit score. The company's assessment toolset takes into account consumers' names, addresses and phone numbers. It may also look at digital footprint data, including a customer's operating system, their email address, device type, the time they make a purchase, among other considerations. Should a customer miss a minimum payment deadline, they're charged a late fee of up to $7, and the company doesn't inform credit bureaus if a customer is unable to pay.

Other providers pitch similar offerings to U.S. consumers. For example, Afterpay said its differentiator is an appeal to younger consumers who are moving away from traditional credit; the lack of a hard credit check; and its push into physical retail. Meanwhile, Klarna, which said it performs soft credit checks for U.S. consumers, said what sets it apart is compatibility with online and offline retail, along with added features like a shopping app that offers consumers the capability to shop any online store and access deals and price drop notifications through its loyalty program, Vibe.

Dealing with risk

Similar to U.S. providers, overseas-based BNPL providers operating in the U.S. that spoke with Payments Dive said their assessments of the consumer's ability to pay doesn't affect credit scores, and if a customer can't pay, they may incur a nominal fee, but credit bureaus won't be notified. Quadpay said less that 2% of its customers are late with payments.

Nonetheless, mindful of the risk some consumers may take on with BNPL payments, Australian regulators imposed a code for BNPL companies that came into effect in March 2021. It sets caps on the number of late payments a person can accrue, along with mandatory financial checks to assess consumers' ability to pay. 

The U.K. also announced plans to regulate the BNPL sector in 2021. It is unclear whether U.S. regulators will follow suit.

"One of the questions with the new [Biden] administration is: What stance will the Consumer Financial Protection Bureau take going forward?" BTIG analyst Mark Palmer recently told Reuters. He suggested that under the Biden administration the bureau is likely to be "more aggressive."

Zip's Diamond contends that the BNPL industry developed tools that sufficiently insulate them from risk. They also ensure only customers who have the ability to repay are approved to use the platform, he added.

"The buy now, pay later sector has proven that it can withstand seismic shocks," Diamond said, noting that losses are incorporated into their revenue models. "We're getting more information than you would get from a traditional credit card [and] the repayment velocity allows you to adjust accordingly."

Ben Pressley, executive vice president of sales, operations and strategy at Afterpay, echoed similar views on risk management.

"We feel very confident in our approach to risk management, as demonstrated by our strong results in these loss rates which has consistently been below 1% of total gross merchandise volume," he said.

While providers say they're offering a less risky alternative to credit cards, some recent research highlights consumer risks with the model. According to a survey from consultancy and research firm Cornerstone Advisors, 43% of BNPL users have been late with a payment. The problem, according to Research Director Ron Shevlin, stems from "losing track" of the payment. 

"The fact that 'losing track of the payment' was the most frequent reason for late payments suggests that many BNPL users are in over their heads from an inability to manage their money efficiently," he wrote in a recent article explaining the findings of the survey.

Others suggest that by not linking repayment behavior to a consumer's credit score, some may be missing out on the ability to build credit over time.

"If they do make all the installment payments over time, it doesn't go to build their credit score, which is a challenge for folks that do need to at some point have access to that to get a car loan or buy a house or whatever the case may be," said Ginger Schmeltzer, senior analyst at Aite Group. "So there's pros and cons to that sort of off-credit-bureau credit assessment."

An expanding market

Schmeltzer contends that at least for now, the BNPL market in the U.S. is in a hyper-growth phase, with growing opportunities for newer entrants.

Quadpay's Ezra said the company plans to expand the field of offerings for U.S. consumers. "There's certainly more product features that millennial consumers are interested in — digital banking, and things like Bitcoin and trading shares," he said. "BNPL will be at our core, but I think there are many ways that we can serve the consumer further with additional products."

As companies experiment with cashierless checkouts, Starbucks and Amazon teamed up to open a Starbucks Pickup with Amazon Go in New York City in November, according to a press release. The two plan to open more stores in 2022, starting with another location at The New York Times Building in New York City. 

The new store offers the full Starbucks menu and a curated selection of food and beverages in the Amazon Go market, including salads, sandwiches, bakery items and snacks. The location also features a lounge with individual workspaces and expanded tables with power outlets and USB ports. 

Customers can use the Starbucks app to order ahead. Once in the store, they can find the status of their order on a digital screen and pick it up. To enter the Amazon Go market and lounge, customers can use the "in-store code" on the Amazon shopping app, Amazon One or a credit card. Once in the store, shoppers can take products, which will then be automatically added to their virtual cart. When a customer leaves the Amazon Go market their card will then be charged and they can access their receipt "within a few hours," according to the company. 

Starbucks and Amazon's new concept comes as retail has grown more accustomed to cashierless stores, especially with a pandemic that made customers wary of physical contact. 

Just before the pandemic caused states to issue shelter-in-place orders in mid-March 2020, Amazon began selling its cashierless technology for other retailers to use. Travel convenience store retailer Hudson announced plans earlier this year to implement Amazon's Just Walk Out technology at the Dallas Love Field Airport and other locations. 

"The new Starbucks Pickup with Amazon Go is designed to provide our customers with an experience that delivers convenience and connection in an effortless way," Katie Young, senior vice president of global growth and development at Starbucks, said. "Our goal with this new store concept is to give our customers the ability to choose which experience is right for them as they go through their day, whether it is utilizing the Starbucks and Amazon apps to purchase food and beverages on the go, or deciding to stay in the lounge for the traditional third place experience Starbucks is known for."

Research suggests that consumers are interested in cashierless options in stores, but the customer experience needs improvement. A 2020 report from USA Technologies and PYMNTS.com said that over a third of customers found unattended retail options appealing because of their shorter lines, and a third said the option lets them make purchases without talking with staffers. Yet, dissatisfied consumers reported that they felt unattended terminals were hard to use and they did not trust the systems to charge them the correct amount, according to the report. 

For Starbucks, the move comes amid a unionization effort among its staffers and a widespread worker shortage that has hit the restaurant industry particularly hard. The company was accused of union busting tactics in a National Labor Relations Board complaint filed earlier in November. And, like other major companies, Starbucks increased its minimum wage to $15 per hour to attract workers. 

The head of the Financial Technology Association defended buy now, pay later financing deals at a congressional hearing in November against claims by critics that they encourage consumers to spend more than they can afford, damaging their credit score in the process.

In testimony presented to the House Financial Services Committee's Task Force on Financial Technology, Financial Technology Association CEO Penny Lee argued that BNPL services offer consumers a better deal than credit cards that charge high-interest rates that can take years to pay off. She said that technological advances like BNPL also lower borrowers' costs and increase choice for both consumers and businesses.

"There is a shift in how millennials, Gen Zers, and others are spending their money," Lee said. "They are saving more and utilizing credit cards less, preferring debit cards with no fees or revolving interest rates."

BNPL allows consumers to finance purchases by spreading out payments, which are typically interest-free, over a short period over six to eight weeks.

At the same time, the U.S. market is still in its infancy compared with other parts of the world, though demand for BNPL continues to soar, the coronavirus pandemic notwithstanding.

Accenture estimates that BNPL spending increased 230% since the start of 2020. BNPL will account for 6% of U.S. e-commerce sales in 2021, or $974.2 billion. By 2025, that figure will top $1.4 billion, or 13% of online shopping, according to Accenture.

Critics have many concerns.

"As we saw with credit cards being pushed on college campuses, this can saddle young people with debt, starting their journey to adulthood with damaged credit and potential for life-long negative financial consequences," said Marisabel Torres, director of California policy at the Center for Responsible Lending, in testimony before the House. "There is also concern that the entire business model of buy now-pay later rests on driving borrowers to purchase items they would not otherwise buy."

According to a Credit Karma study, 34% of BNPL users have fallen behind on one or more payments. The survey found that 72% of users said they believe their credit score declined. More than 30% of respondents said their credit score decreased significantly. 

Lee countered the argument by critics, noting that 97% of BNPL users didn't incur late fees.

"The benefits of BNPL are apparent regardless of merchant size, with large and small merchants seeing considerable improvement across business metrics," Lee said. "Another recent survey found that merchants using a particular BNPL solution enjoyed 13% more new customers."

Credit Karma also found 44% of Americans used BNPL to buy products they needed, up slightly from a year earlier. Three-quarters of BNPL users have tapped the service at least twice, according to Credit Karma.

"The exponential growth of these alternative financial products clearly shows that consumers want them," said Rep. Warren Davidson (R-OH). "We should avoid punishing new products, not fitting within regulatory buckets that were already built," Davidson said during the hearing. "You should avoid overly impairing consumer choices on how they spend money, and we should facilitate innovation."

To provide consumers with a social shopping experience, Klarna acquired platform Hero for an undisclosed sum, the payments company announced in July. 

As part of the deal, Klarna's 250,000 retail partners will gain access to Hero, allowing in-store staffers to create content and provide advice to customers. Among Hero's current clients are Levi's, Rag & Bone and Chloé, according to a press release.

Klarna noted that it has also recently acquired two other companies: Shoptail, a comparison shopping company, and Toplooks, an artificial intelligence-based styling & shoppable content platform.

In the future, Klarna wants to become part of the social shopping experience for its 90 million international customers, David Sandström, chief marketing officer of Klarna, noted in a statement. The payments platform aims to be the place where shoppers can make purchases and bank in whichever way is convenient for them, Sandström added. 

"We see a huge opportunity to leverage Hero's existing platform and expertise to allow in-store retail professionals to become global brand ambassadors," Sebastian Siemiatkowski, CEO of Klarna, said in a statement.

The acquisitions of Hero and other startups follow Klarna's recent fundraising spree. In October 2020, the buy now, pay later platform raised an undisclosed amount from Macy's and partnered with the retailer to offer customers interest-free installment payments. In March 2021, the platform raised $1 billion to fund its global expansion. In June, the company raised another $639 million, bringing the total funds raised to about $3.7 billion since the company was founded in 2005.

Besides acquiring startups and raising capital, Klarna has grown its user base and implemented new features on the platform. During the summer of 2020, the company announced that it had nearly 8 million customers in the U.S. and integrated its service with Google Pay to let shoppers pay for goods in-store. In 2019, the company began allowing shoppers to pay for their purchases via the app in installments without interest or fees. 

Meanwhile, Hero has enhanced its platform through key partnerships and adding new features. Klarna's acquisition announcement noted that the two companies already had mutual retail partners like Nike and JD Sports. Plus, the platform also partnered with Shopify in 2020 to help sellers create virtual shopping experiences for shoppers, including features like video chats with staffers. And in June 2021, the platform introduced a short-form video feature, which lets brands create shoppable videos and track their engagement. 

While Klarna and Hero aim to capitalize on the shoppable content trend, other platforms, including Instagram and Snapchat, have rolled out similar tools. In fact, Instagram recently declared that it will focus more on commerce, video, creators and messaging to compete with other platforms like TikTok.

As the COVID-19 pandemic continues, retailers have pivoted to give consumers more choices via their mobile apps. Incognia. a location identity company, examined multiple retailers, including Best Buy, Costco, Walmart and Target, for traits ranging from the number of clicks and fields required to complete transactions to the variety of payment and purchase options available to shoppers.

Incognia found that more than 80% of retailers surveyed supported PayPal's in-app payment option, but only 20% supported Apple Pay, according to a report shared with Retail Dive.

Incognia's research also found that two-thirds of retail apps surveyed provided BOPIS options for consumers.

Among the apps with the lowest checkout friction for pickup purchases were Lowe's, Bed Bath & Beyond and Home Depot. Meanwhile, Sephora, Lowe's and Home Depot had the lowest checkout friction for delivery purchases, per the report.

"The pandemic caused an influx of consumers to shop on their mobile phones, and top retailers responded by investing in their mCommerce apps. For retailers, the purchasing experience is critical to the customer experience," André Ferraz, founder and CEO of Incognia, said in a statement. Ferraz added that the level of checkout friction "can easily make or break customer satisfaction and retention."

Given that COVID-19 has complicated in-store shopping, more retailers, including Tractor Supply and Francesca's, have recently debuted mobile apps. Lowe's and Home Depot, which earned top marks in Incognia's study for frictionless checkout experiences, both saw a record-breaking spike in app downloads last year. 

Of course, a variety of payment options could be critical for retailers courting mobile customers. According to a Sensor Tower report, consumers spent more than $100 billion via mobile apps and games around the world in 2020, suggesting that mobile will be vital for the foreseeable future. And research from Finaria estimates that the mobile wallet market will reach $2.4 trillion in 2021 and increase to $3.5 trillion by 2023.

Meanwhile, both PayPal and Apple Pay have introduced features aimed at luring new customers. PayPal released an installment payment feature in September. And in addition to adding Kroger to its list of retailers last summer, in addition to many others, Apple Pay began accepting BitPay Prepaid Mastercard into its mobile wallet back in February.

Senate Majority Whip Dick Durbin was riled up when he leaned into his microphone to speak at an antitrust subcommittee hearing. The source of his consternation? The dominance of Visa and Mastercard.

Durbin, a Democrat, recounted how he had walked into that same Senate chamber 15 years ago when the late Sen. Arlen Specter, who once chaired the Judiciary Committee, schooled him in interchange, or 'swipe,' fees imposed by the credit card networks.

Now, as the Judiciary chairman in a newly Democrat-controlled Senate, he still has Visa and Mastercard in his sights, and still believes their fees are out of control.

"Visa and Mastercard still are so dominant in the payments market that merchants couldn't stay in business without using their cards," he said during a recent subcommittee hearing, noting U.S. retailers and merchants paid a "staggering" $62.5 billion in swipe fees last year. "All those costs are ultimately borne by consumers across America."

Such attacks on Visa, the dominant card network company, and no. 2 Mastercard, have persisted for decades on Capitol Hill, in the courts and at the U.S. Department of Justice. Now, they've flared up again — with Democrats in control of Congress and the White House this year — for the first time since 2011. Durbin's aggressive stance, a DOJ investigation into Visa's debit card business, and merchant litigation against the two companies amounts to the biggest threat to Visa and Mastercard's businesses in a decade, as detractors take aim at debit and credit fees. The confrontations could mean billions of dollars in legal damages, and potentially billions more in lost revenue, just as the two 20th-century payments companies face 21st-century fintech and crypto competition.

The latest irritant for Durbin — and his merchant organization allies including the National Retail Federation and Merchants Payments Coalition — was a plan by Visa and Mastercard to increase credit card swipe fees last month. Durbin called it a blow to American businesses and consumers recovering from COVID-19's impact.

While Durbin won curbs on debit fees with a 2010 amendment to the Wall Street Reform and Consumer Protection Act, credit card fees remain unchecked. The credit interchange fees average about 2.25% per transaction. While bank issuers of the cards take the lion's share of the fee, the card networks set the fee and take a slice too. Both credit and debit fees are anathema to the opponents.

"Where is the policing authority to stop this duopoly from doing this to every merchant retailer in America," he said at the hearing. "I don't see it."

Within days San Francisco-based Visa and Purchase, New York-based Mastercard caved, saying they wouldn't pursue the broad-based credit card fee increases. "We will not make any future rate changes in the U.S. for another year while the economy recovers," Visa said in a statement.

It was a repeat of back-pedaling they did last year in holding off a previously scheduled fee increase because of the pandemic. Durbin praised their latest moves, but some merchant groups remain outraged.

"Credit card swipe fees paid by U.S. merchants are among the highest in the world," the MPC said in a statement the same day. "Rather than just delaying an increase, they need to lower these fees ... Since they haven't shown any sign of doing that voluntarily, it's time for Congress and enforcement agencies to take action."

DOJ scrutiny

Three days after Visa's statement about not raising fees, it disclosed in a regulatory filing that the Justice Department said it planned to open an investigation into its U.S. debit card practices. In the filing, Visa said its debit business adhered to the law and is cooperating with the DOJ.

Visa has been mum on the probe since then. "We are not able to comment on any ongoing investigations or litigation underway, nor would we speculate on the topics," said Visa spokesman Andy Gerit.

The antitrust division investigation turns on whether Visa incented banks to limit merchants' ability to route transactions over less expensive networks, The Wall Street Journal reported, citing sources familiar with the probe.

It's similar to a Federal Trade Commission inquiry that has been underway for more than a year, delving into whether Visa illegally "inhibited merchant choice in the selection of debit payments networks," according to Visa's annual filing with the SEC last year. It focuses whether transactions are illicitly routed away from alternative networks such as Pulse, NYCE and Star.

Routing has become a bigger concern with the explosion of e-commerce prompted by the COVID-19 pandemic. "It's really renewed the interest and the need to do something," said Hannah Walker, vice president of political affairs for FMI - The Food Industry Association, which represents grocery wholesalers and manufacturers. Grocers' higher pandemic costs and slim 2% profit margins underscore the urgency, she said.

Durbin, along with U.S. Rep. Peter Welch, D-VT, also asked the Federal Reserve to look into potential anti-competitive actions by Visa in the debit card market last year.

"Merchants are always going to complain about the fees they're charged and every now and then regulators are going to listen," said Brett Horn, a Morningstar analyst who covers the credit card network companies.

In a striking contrast to the grocers, Visa's profit margins have been about 50% over the past decade; Mastercard's has been 35% to 40%, Horn estimates.

FMI and other trade organizations aim to ensure the landmark 2010 'Durbin Amendment' is enforced. It's supposed to cap debit fees at .05% of each transaction, plus 21 cents, and another cent if the bank issuer offers certain fraud protections. It also requires access to competing networks during a transaction. The cap only applies to banks with more than $10 billion in assets.

Still, debit card transactions rose during the pandemic as consumers eschewed credit amid the uncertain economic outlook. And Visa's business benefited.

"Debit has continued to grow at a very healthy clip," Visa Chief Financial Officer Vasant Prabhu said during a Wolfe Research webcast, describing trends in the first three months of the year. "It was up 22%. So, debit remains sort of the way in which people are adopting more digital payments ... but credit is recovering nicely."

Regarding the then proposed interchange fee increase, Prabhu called them "adjustments" to reflect the current world situation and to combat fraud. He also noted they hadn't been raised in "a very long time."

Plaid acquisition called off

Even before President Donald Trump left office in January, DOJ's antitrust division sued Visa to stop its $5.3 billion acquisition of Plaid, a fintech company contemplating an electronic debit payment network to rival Visa's.

Plaid isn't the only new competitor. Fintech companies from Square to PayPal are innovating on this front, and rising crypto currency enterprises, with their blockchain technology, could remake the payments landscape entirely.

Nonetheless, in its civil lawsuit, the Justice Department said Visa violated antitrust laws in seeking to buy Plaid in 2019. "By acquiring Plaid, Visa would eliminate a nascent competitive threat that would likely result in substantial savings and more innovative online debit services for merchants and consumers," the November lawsuit said.

"Visa is a monopolist in online debit transactions, extracting billions of dollars in fees annually from merchants and consumers," the agency alleged, noting that Visa controls 70% of the online debit transaction market, and earned about $4 billion from it in 2019. That's about a fifth of the $22 billion in annual net revenue reported last year.

The DOJ lawsuit, filed in U.S. District Court for Northern California, included a sketch drawn by one of Visa's top executives to illustrate the company's apprehension about Plaid. The illustration showed an island volcano with the phrases "bank connections" and "account validation" at the top, above sea level, and other labels like "identity matching" and "credit decisioning," below the surface in alarming red ink.

Plaid's current capabilities are "the tip," and underwater is "a massive opportunity – one that threatens Visa," he told his colleagues, according to the lawsuit.

Visa called the lawsuit "misguided" and argued in its court response last year that DOJ's allegations revolved around Plaid as a "potential" competitor, and not the reality of the situation. Visa also noted Mastercard, American Express and Discover Financial Services as rivals.

"In reality, the significant, tangible, near-term benefits that will be derived from the transaction simply dwarf the highly remote and speculative risk of anticompetitive effects that Plaintiff posits," Visa said in its court response.

Among the benefits, Visa noted plans to change Plaid's interface to provide its customers with new services and to accelerate Plaid's migration to international markets. Nonetheless, Visa and Plaid dropped their merger plans in January, citing the "complex and protracted litigation" in a joint statement.

Long history of litigation

Battles over network fees reach even further back. "You have two dominant players who are always trying to find ways to restrain trade and impose improper fees on merchants," said New York antitrust lawyer Lloyd Constantine. "So, we're always suing them and regulators are always investigating and suing them."

Constantine, whose career history bridges the two companies' antitrust strife over three-plus decades, today is a founding partner at the boutique firm Constantine Cannon in New York. As assistant attorney general and antitrust chief for New York State in the 1980s, Constantine led one of the first successful antitrust actions against the two companies, when New York and other states sued Visa and Mastercard in 1989 to stop them from teaming up on a new debit venture called Entree. The companies dropped their plan the following year.

Visa got its start in 1958 when Bank of America launched it as part of a consumer credit card program, while a predecessor to Mastercard was created by a group of banks in 1966. They were spun off by bank owners more than a decade ago.

Their "duopoly" today results from a "conscious parallelism," whereby Visa and Mastercard simply follow each other's market moves, said Constantine. No smoke-filled rooms with signed agreements required, he said.

Constantine's firm is pursuing a multi-billion-dollar lawsuit against the two companies on behalf of some 60 of the biggest U.S. merchants and retailers, including Starbucks, Amazon, Costco, and the parent company of AMC theaters. That case, scheduled to go to trial next year, targets Visa and Mastercard's credit businesses more than their debit businesses, Constantine said. It argues that the two companies prevent merchants from accessing more cost effective payment channels. For instance, the two companies have stifled bank efforts to connect more directly with merchants, Constantine said in describing the lawsuit's allegations. In other parts of the world, the networks are cheaper, faster and safer, he argues.

That lawsuit, playing in U.S. District Court in Eastern New York, grew out of litigation by a group of smaller merchants still struggling to finalize a $5.5 billion settlement. The big peers opted out and sued on their own because a proposed settlement in the case didn't provide enough compensation, and didn't sufficiently rein in anticompetitive behavior, Constantine said.

In its most recent annual filing with the SEC, Visa describes the potential impact: "Although the Company believes that it has strong defenses for the litigation and regulatory proceedings described below, it could, in the future, incur judgments or fines or enter into settlements of claims that could have a material adverse effect on the Company's financial position, results of operations or cash flows."

Despite the ongoing pressure, shares of Visa and Mastercard have risen this year in tandem with the Standard & Poor's 500 Index. Horn said he expects the companies, with their $400 billion to $500 billion market capitalizations, to simply keep absorbing whatever legal damages and fines come down the pike.

"It's a real cost for them, but I don't think it's a situation that weakens their competitive position in a meaningful way," he said.

Fed's role in debit fees

Merchants won a $3.4 billion settlement against the card networks in 2003 against Visa and Mastercard over their debit fees that provided court relief of $87 billion in debit savings for merchants over 10 years, Constantine said. Along with the 2010 Dubin Amendment, it reined in debit fees, despite one shortcoming, according to people in his camp. Under the Durbin law, the Federal Reserve is required to determine a cost basis for the debit cap, based on expenses to process the transactions. That calculation hasn't changed since 2011.

"If the amendment had been properly implemented by the Federal Reserve those charges would have been even lower than they are now," said Constantine, who believes the figure should be closer to 13 cents. "This is an opportunity for the Fed to revisit what we consider to be an erroneous determination."

The Fed's biennial update on the cost is due any day now, based on past practice. If the Fed finally lowers the cost basis, it will be another knock on the card network companies. Fed spokeswoman Susan Stawick declined to comment on when the latest report will be published.

Alix Partners Managing Director Mark Flamme points to a 2015 Richmond Federal Reserve Bank study as evidence that merchants may not actually pass fee savings to consumers. "Their argument rings hollow," Flamme said of those calling for reduced fees. The study also notes that the Durbin Amendment "produced unintended consequences for some merchants in terms of raising costs."

'Tectonic shift' in Congress

Still, there has been a "tectonic shift" in awareness of these issues with more openness in Congress to the notion of addressing structural problems in the card network industry, said a Durbin aide who asked not to be named. Now, more people are paying attention to these dominant players in this "critical market," with the "same sort of competition concerns for credit as for debit," he said.

Credit swipe fees soared in recent years, more than doubling to $67.6 billion in 2019 for Visa and MasterCard, from $25.6 billion a year in 2009, said Craig Shearman, a spokesman for the NRF and MPC, citing statistics from the industry research firm Nilson Report.

On $3.6 trillion in U.S. credit card purchases last year, Visa controls 53.7% of the market, Mastercard has a 23.2% share, American Express has a 19.2% share, and Discover 4%, according to Nilson Report.

An AmEx spokeswoman declined to comment for this story. Mastercard and Discover didn't respond to a request for comment.

The Durbin aide said he wasn't aware of any current legislative proposals spearheading the credit issues, and noted any bill on the issue could still be a "tough legislative lift" in an evenly divided Senate.

Nonetheless, the merchant and retail interest groups are ready with ideas for reform. Creating an independent regulatory body to oversee fee-setting is one proposal, said Leon Buck, NRF's vice president for government relations, banking and financial services. "We need a body that's sole purpose is to regulate this activity," he said.

Focus on debit fee enforcement

Not even the merchant and retail groups are plugging for new legislation at the moment. NRF's Buck and FMI's Walker both said enforcing existing debit laws should be the priority. They seem cognizant that Durbin is preoccupied with President Biden's legislative priorities, namely providing pandemic relief and developing a plan to overhaul U.S. infrastructure.

Visa and Mastercard have found a way to chime in there too. This year, they formed a new advocacy group, along with payment processors, Payments Leadership Council. Its founding director, Raj Date, wouldn't comment on the regulatory and litigation challenges facing the industry, but he's broadcasting the council members' contributions to Biden's agenda, touting their role in the distribution of debit cards for pandemic relief programs and bolstering security for increased e-commerce.

The Electronic Transactions Association, which also includes Visa and Mastercard, declined to comment on those fee travails as well.

The new council's CEOs met with Treasury Department Deputy Secretary Wally Adeyemo this month and discussed broadband infrastructure for small businesses and financial services for the underbanked, among other things, according to Date and a Treasury Department statement.

"Our ambition would be to be a resource to policymakers and at the same time ... to have a point of view on big-ticket future issues," Date said.

If the federal investigation and litigation outcomes fall short of fee opponents' goals, Durbin and his anti-fee allies may yet make legislative proposals one of those issues.