Do you use your credit card when you need a “credit” (or a loan) or “card protection” or just for convenience? Do you know what are the implications of you choosing a certain payment method when you make a retail payment?

The instrument we choose while paying will affect all the companies in the commerce industry.  I think that many of us don’t even think much before deciding how we pay. Using cash or cash-based instruments over credit card when you are at a Subway store – and I mean this in a collective way – would rattle a company like Visa, Mastercard, BofA and Chase. I gave the Subway example because you most probably don’t need a “credit” or a “loan” for that transaction. You may not even need a debit card or a prepaid card. You don’t need any credit card related benefits for this transaction. All you need is the “convenience”. Of course, there are quite a few purchases where you will be better off using a credit card.

Why is this topic hot now? With the new CARD act, the Durbin amendment and the recent merchant settlement with V/MA, there are tremendous implications to the entire ecosystem. Merchants are NO LONGER constrained by V/MA/AXP rules on giving certain discounts or adding surcharges for accepting certain kinds of payment instruments. They will also have an option to choose what networks they connect for getting debit card authorizations. I have listed some implications to various players in the system below.

Of course, the consumer behavior will be different in different segments of the retail industry.  Just to give you a sense of how big the implications, let us see how big the market size is (of course, only in the US). The overall retail market size in the US is around $4.3 trillion (data based on 2010) and here is the split:

Source: 2010 data from US department of Commerce

I suspect that these will be the near-term implications to various players in the ecosystem:

1. The merchants have an opportunity to reduce their payment-related fees.

2. New companies have an opportunity to create new products that balance the convenience-cost-need of the payment mechanisms of the consumers.

3. The incumbent companies are forced to increase the value to the merchant-consumer ecosystem to justify the fee-structures.

4. Consumers will be flooded with new products/offers/ models.  Merchants will be flooded with new and different value propositions by the processors/acquirers/new product vendors.

5. Large, but Agile companies and highly funded start ups will have a tremendous advantage.

6. Technology vendors will reap the benefits of the chaotic situation. More projects

7. Financial Institutions – Buy or Build or Acquire or Collaborate or die??

While these will be true in all the retail segments in the long term, there are some retail sectors where the impact will be quicker.  My view is that the following sectors will see a big decline in the creditcard usage and a quick adoption of cash-based instruments.

1.  Gas Stations: We have already seen many gas stations providing a discount for payment by cash or debit card. Over the next few months, we will see a lot more gas stations working on such discounts.  If I get a large snicker bar for filling a gas tank if I choose to pay by cash, I will think twice before swiping

2. Food Services : QSRs (Quick Service Restaurants)  sales amount to $250b. Very low margins but high volumes.  Startups see this as THE segment to launch their products.  Many products use credit cards in their offerings but once they have a critical mass, they can introduce cash-based instruments and the associated discounts..  FSRs (Full Service restaurants) also have a considerable size – $200b.  Cool new payment products can be introduced here.

3. Food and beverage stores: Consumers typically don’t need a “credit” and nor do they need “card benefits” for these kinds of transactions. They use cards here mostly for convenience..  This $580 b sector is calling for innovators!! Debit cards are suitable, but a cash based instrument could thrive in this scenario.. A closed-loop card or a decoupled debit card will work great in big chains while a 3rd party digital money scheme would work well in smaller chains/mom-and-pop shops.

4. Automobile sector: Checks and other large value payment instruments are typically used and my guess is that credit card usage is low except in the $80b auto parts industry. Not much of an impact in terms of credit card usage.

5. General merchandise stores: Another mammoth $600b industry. Typically, the size of these stores is very large as well as the ticket size.  Other stores may develop their own systems (For eg,  REDCard by Target, which is a decoupled debit system).  Here is where the merchants could come together to form their own payment network parallel to  the Visa network! There are rumors that part of the huge $7b settlement money from Visa/Mastercard could fund such an initiative. This segment loathes financial institutions and the fees charged by them.

6. Health and personal care stores: I think they are similar to Food and beverage stores in terms of card usage behavior. Lot of loyalty and offers based systems could thrive in this environment. Groupon payment group – I think you should focus on this sector and get a foothold on this $250b industry before looking anywhere else.

7. Furniture, Clothing, Electronics, Sporting, etc. – In my view, this is where the credit card is most suitable for the benefits it provides. People – use your credit cards to the limit in these stores! Visa, Amex, Mastercard, Issuers- maybe you can introduce new products and discounts in these segments to keep your credit card businesses!

Anyway, you may disagree with some of my views but you won’t disagree that there will be a huge behavioral change leading to new opportunities .