GUEST COMMENT Interchange fee regulation: a double-edged sword for retailers
The European Interchange Fee Regulation (IFR), which came into effect in December 2015, stipulates that card acquirers must now cap their interchange fees at 0.2% per transaction for debit cards and 0.3% for credit cards.
On the face of it, this should translate into huge cost savings for retailers who, prior to the regulation paid as much as 0.8% on credit card transactions, for example. Indeed, CMSpi calculates that UK retailers should save 25% per annum on average.
However, many will face an uphill struggle if they are to benefit from any real savings following the IFR’s implementation – and some may even end up seeing their overall card costs rise. Here’s why.
Transference of savings
Acquirers have a proven history of failing to pass on interchange savings in full to merchants. Both Visa and MasterCard, for instance, introduced partial reductions to their UK interchange fees prior to December’s IFR implementation (Visa altered its domestic UK debit card interchange fee structure in March 2015, and MasterCard made changes to its credit card interchange fees in April and September 2015), yet many instances were observed in which a significant portion of the savings due to merchants were withheld. UK retailers are therefore already out of pocket.
For those hoping that the IFR’s official implementation will resolve this issue, such behaviour has also been seen in countries where the IFR is an established regulation (such as Australia and the US). We can therefore expect more of the same in Europe.
Those most likely to be affected are retailers charged via a blended pricing structure, which amalgamates each separate type of card transaction fee into one, called the merchant service charge (MSC). The majority of small-and-medium-sized UK merchants are currently charged in this way by their acquirers. While blended pricing is favoured by some due to its simplicity and ease of reconciliation, the lack of clarity regarding individual fees makes identifying whether the full extent of IFR savings are being transferred extremely challenging; leaving retailers exposed to the possibility that acquirers may be failing to fully adjust the interchange pricing.
Merchants therefore need to adopt a proactive stance when it comes to interchange to ensure the savings owed to them are being passed on in their entirety. Certainly, the IFR is helping to generate substantial saving opportunities, and by seeking advice, understanding costs and reviewing their pricing structures, retailers can feel reassured that they are positioned to grasp the full extent of the benefits.
The next challenge
Leveraging savings opportunities will be all the more important in the coming months, as it is anticipated that a plethora of new card fees will be introduced by acquirers to compensate for revenue lost as a result of the IFR.
Following the implementation of the IFR in the US, retailers were hit with a bombardment of additional charges, including various types of 'management', 'transaction' and 'application' fees. Not to mention Visa’s controversial Fixed Acquirer Network Fee (FANF) – a monthly charged based on the volume of transactions which has resulted in some larger US companies being charged millions of dollars per annum. It is almost certain that European acquirers will follow suit by creating obscure 'replacement' fees in a bid to boost income.
Indeed, MasterCard has already announced four changes to its fees, including the establishment of a €15 'dispute administration fee' per chargeback raised. In the case of Visa, the looming sale of Visa Europe to Visa Inc. will likely fuel the 'new fee fire' even further. This is because, while Visa Europe is a not-for-profit organisation, Visa Inc. is a profit-hungry, listed company which currently generates far higher revenue per transaction and profit per transaction than Visa Europe. No doubt, Visa Inc. will be looking to remedy such discrepancies to appease shareholders when it takes up the reins later this year – which is further bad news for European merchants.
Certainly, card transaction fees are in the midst of considerable upheaval. The IFR is generating considerable saving opportunities for many, yet has also inadvertently created a platform for acquirers to introduce new fees that could potentially cancel out or even exceed any amounts saved.
In this time of change, it is more important than ever that retailers are astute and positioned to navigate the growing complexities. They must be equipped with a thorough understanding of the unfolding card fee landscape in order to keep costs to a minimum and capitalise on the benefits of the IFR. Without doubt, there are challenges ahead, but vigilantly reviewing and negotiating their charges can help retailers ensure they are not being short changed and are getting the best deals from their acquirers.Callum Godwin is research manager at CMS Payments Intelligence (CMSpi)