How Net Neutrality Threats May Result in 'Preferential Payments'

The topic of net neutrality has recently been beaming around all corners of the internet, generating 33 million search hits on Google.

How Net Neutrality Threats May Result in 'Preferential Payments'

How Net Neutrality Threats May Result in 'Preferential Payments'

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Trevor Forbes

Trevor Forbes is the Director of Metrics at the Strawhecker Group. From report and illustration production, content strategy, and client projects, Trevor is active throughout TSG's business.

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The topic of net neutrality has recently been beaming around all corners of the internet, generating 33 million search hits on Google. Many are discussing how the Federal Communications Commission's (FCC) decision to dismantle protections that keep internet traffic equal will impact their experiences across many facets of their lives.

The ruling against an equal internet permits internet service providers (ISPs) to leverage three main manipulations of internet use:

Blocking: Lawful internet destinations can be censored.

Prioritization: Payment can be accepted in return for internet speed priority or 'fast lanes' — which unavoidably come at the cost of other stakeholders that will be relegated to 'slow lanes.'

Throttling: Internet service providers can intentionally slow down the speed of certain internet traffic.

With the electronic payments industry being a starting player in the internet game, having a free-flowing internet is fundamental. Those in favor of dismantled net neutrality, or at least those who are not concerned about it, cite a few reasons as to why it will not harm the internet as we know it. These reasons include the fact that ISPs have made statements that they will not discriminate against internet traffic; that problems with neutrality did not arise before the 2015 Obama-era regulations intended to preserve equality; and that these laws will encourage ISPs to build up their networks.

These arguments do not provide much confidence, as past norms do not always dictate future ones, particularly as the internet is continually increasing in its role as a conduit for commerce. Many believe the internet will remain ‘business as usual’ for the near future. But as time goes on and internet usage increases further, the dark side of the new rulings may become evident.

Slower volume growth by hindered innovation

For the electronic payments industry, a few setbacks could occur.

A few foreseeable areas where the electronic payments industry might see slowed card volume and revenue include:

  • The small- to medium-sized business (SMB) market
  • Cloud-based point-of-sales
  • Digital goods
  • The internet of things (IoT)

Small business slowdowns

For example, in the SMB market, if fast internet packages become priced outside of a clothing boutique's budget, credit card transaction speeds might be slow enough to push consumers elsewhere — to large corporations that can afford high-priced, zippy internet. This type of delay is significant, and offline processing doesn't really help. Products like Clover and Square require an active internet connection to run chip and near-field communication (NFC) transactions.

The ruling against an equal internet permits internet service providers (ISPs) to leverage three main manipulations of internet use: Throttling, Blocking, Prioritization

If certain SMBs close up shop due to customer loss, this is a bad situation for merchant acquirers, as SMBs offer higher profitability per merchant than major merchants. The Strawhecker Group's merchant acquirer pricing data, sourced from 3.5 million merchants, shows that businesses with annual processing volume below $250,000 generate an average of $0.34 more of net revenue per transaction than merchants above that volume tier. If the U.S. SMB pool shrinks, acquirer margins could too.

More cumbersome in the cloud

Cloud-based point-of-sale (POS) systems pose another issue. These terminal providers are the future of business management and card acceptance and are starting to be used widely among SMBs. Net neutrality disadvantages will stifle competition in this space and jeopardize the merchant and terminal relationship on both sides.

POS providers could be charged more to service SMB clients properly, while SMBs could be charged more to have sufficient internet to run the system. Additionally, large players that often rely on acquisitions will have a smaller pond in which to fish.

Digital media doldrums

Additionally, digital media, like downloadable games, in-game purchases, streaming video and music, could see slower purchase growth. In 2015, Visa and Mastercard created entirely new merchant category codes (MCCs) for digital goods merchants because this space is undergoing massive growth and needs special attention.

This area, which is estimated by The Strawhecker Group to be a $40 billion-per-year group of industries in the United States, is highly vulnerable to net neutrality regulations. With the new rulings, ISPs can deploy more tiers in their internet pricing packages, as well as add-on packages, such as $15 a month for adequate gaming bandwidth or $5 extra for Spotify use. This will drive some consumers to buy fewer digital goods — leaving less space for the payments industry to grow.

Internet of things issues

Lastly, the internet of things, a phenomenon that connects Wi-Fi to various physical products like speakers, light switches and refrigerators, is at risk. These applications are primed for integrated payments (like telling your dishwasher to order more detergent).

Major tech corporations have made moves into this area, but if blocking, throttling or prioritization begins, startups looking to advance this space further will deal with an increasingly uneven playing field, offering fewer open lanes for payments to utilize. Also, ISPs could start to charge consumers per connected device, causing deaccelerated growth in IoT payment volume.

Internet's status quo

The final status of net neutrality isn't clear. Shortly after the ruling, 21 state attorney generals filed a lawsuit against the FCC, claiming the action went against federal law. Expect the issue to come up in the 2018 election cycle. Despite the alarming possibilities, with the massive pushback the FCC and ISPs have seen, it is reasonable that the internet will preserve its status quo for the time being.

A vital driver and creator of efficiency in the U.S. economy is electronic payments, as the majority of consumer spending is conducted electronically. As time goes on, electronic payments will only increase in importance to the U.S. economy. It’s important that any new net neutrality rules reflect this.

The statements and opinions of the writer do not necessarily reflect those of TSYS.

Other Articles by Trevor

Trevor Forbes

Trevor Forbes is the Director of Metrics at the Strawhecker Group. From report and illustration production, content strategy, and client projects, Trevor is active throughout TSG's business. You will often find him writing copy for TSG products and proposals, coordinating extensive market studies, developing TSG's market strategy, designing documents, and working on client initiatives. Trevor has contributed to more than 100 client engagements, benefiting TSG's notable client base of Fortune 500 companies and other key payments players.

Trevor graduated cum laude from the University of Nebraska Omaha, receiving a Bachelor of Science degree in business administration with a concentration in marketing. Trevor has worked with the Electronic Transactions Association on multiple projects and is currently a member of the TRANSACT Program Planning Committee.

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