How The Payment Industry Benefits From More Transparency Over Interchange
This has been a historic year for the payments industry. Ever since the EU ruled to reduce excessively high interchange fees in September 2014, the industry has been adapting to more change within this past year than the previous five.
Interchange fees first came under EU scrutiny in July 2013, when the European Commission proposed capping the fee retailers pay to card schemes and banks to process payments customers make using credit and debit cards. The ruling in September was the end of a long-running battle between the EU and Visa/MasterCard.
Before this, interchange accounted for 90% of the card processing cost base. This constitutes the bulk of the Merchant Service Charge (“MSC”), which card issuers recharge to merchants. For example, a 1.1% credit card processing fee would result in a charge of 0.8%.
All of that ended when the EU placed a cap of 0.3% for credit cards and 0.2% for debit cards, a massive reduction, forcing greater transparency on the entire industry.
Impact of Interchange on Merchants
Merchants lobbied for and supported this action. The British Retail Consortium estimated this would save them over £480m a year. Before the ruling, a HMRC consultation document stated that, “merchants are expected to pass these savings on to consumers in the form of lower prices.” So far, a retail sector still recovering from lingering price sensitivity as a result of the recession has not been in a hurry to pass these savings on.
Instead of a price per instance (PPI) on debit transactions, Visa & MasterCard have switched to a fixed percentage model, with lower costs for transactions below £35, higher for those above £35, from 1 March onwards.
Non-secure transactions, which includes payments over the phone, even with CVV2/Address verification, has gone up from 10.5p to 0.2% + 11p. Consequently, merchants will be keen to encourage customers to make online payments. MasterCard premium credit card interchange costs are being slowly reduced every quarter, down from 0.8% in April 2015 and set to be fixed at 0.3% on 1 April 2016. This impacts on the World, Signia, World Signia brands.
Visa, MasterCard and the banks implemented most of these changes between March and July of 2015, with other transactional cost modifications taking place throughout the year.
Going Beyond Price: Transparency and Service
Industry watchers and analysts have noticed that there have been “surprisingly little” cost reductions have been passed onto SME and small corporate customers. Large merchants have benefited straight away. On the other hand, “some, but not many, “VIP” merchants received the benefits of lower interchange through tactical re-pricing to retain them.”
Now is the time when merchants are shopping around for new card processing service providers, as a result of a new era of transparency. Payment processing firms can no longer rely on revenue from interchange fees. Instead, the focus has shifted to functionality and service. For merchants, this means considering the following factors:
- Customer service. How much support does your payment processor provide? Can you get the support you need when there are difficulties? As a customer, are you getting the quality of service you deserve for your MSC fee?
- Price transparency. Are they more transparent with pricing and transaction costs as a result of the new EU laws?
- Cross-platform convenience. Merchants need to take payments across a wide range of platforms, given the customers shift to making purchases across smartphones and tablets. This is even more important as a result of phone transactions costing more as a consequence of the new status as a non-secure payment method.
It will be interesting to observe the changes that might take place next year, now the industry has got used to reduced interchange fees across Europe.