2015 is set to be the most volatile year to date for card processing fees. This is the year that the European Union (“EU”) cap on interchange fees will take effect in the UK. Good news for card accepting businesses? Will it mean lower card processing fees? We are a little skeptical based on past form of some merchant acquirers.
EU cap on interchange
In 2015 the EU will cap debit interchange at 0.2% (currently 8p) and credit interchange at 0.3% (currently 0.77% – 0.8%) for chip and pin non-premium transactions. The changes will impact both Visa and Mastercard but so far only Visa has confirmed its revised debit interchange rates to its members. We would expect the revised Mastercard debit and revised credit interchange to be announced later in H2 2015 and probably at around the maximum level of the EU cap.
Visa UK debit changes from 1 March 2015
Visa has already announced its new interchange rates for UK debit cards to its members – 0.2% of transaction value + 1 pence per transaction (capped at a total of 50p) for chip and pin transactions. These changes will take effect as of 1 March 2015 so that means that merchant acquirers should begin to re-price their portfolios in January or February to take account of this change in their cost base – remember interchange is a cost to merchant acquirers and is recovered from merchants through the Merchant Service Charge (“MSC”) which merchants pay. Non-secure transactions carry an additional cost of 10p per transaction and Visa business debit card transactions are capped at a higher amount.
Impact of revised Visa UK debit interchange
UK debit card interchange is currently based on a fixed rate per transaction, 8p for chip and pin transactions. Acquirers add a mark-up then typically charge MSC of 12p-14p per transaction to SME merchants. Debit card costs (unlike credit card costs) are unchanged irrespective of the value of the transaction – merchants pay the same cost for both a £5 debit transaction and a £200 debit transaction.
Clearly when interchange costs change from a fixed rate per transaction to a percentage of transaction value (“ad-valorem”) then higher Average Transaction Values (“ATV”) will incur higher interchange costs (and vice versa) and, in isolation, you would expect merchant acquirers to pass on these costs/savings to merchants through higher or lower MSC.
As you can see, at an ATV of £35, interchange costs are unchanged at 8p per transaction. Below £35, interchange costs are marginally cheaper but above £35 interchange costs become significantly higher. Transactions above £245 will incur interchange costs of 50p, over 6 times the current interchange cost of 8p.
How will merchant acquirer’s re-price your Visa debit transactions?
We have spoken with a few merchant acquirers and asked this question. All admit they havn’t yet fully got their heads round what exactly they will do and are busy running various scenarios through their pricing models, trying to find the optimal strategy. Customer re-pricing is a time of great opportunity and risk for merchant acquirers – how much extra profit can they squeeze out without unnecessarily losing customers. And these new interchange rates are so wide-ranging they offer an unprecedented level of opportunity, risk and uncertainty.
The impact on acquirer pricing and their reaction is dependent on a number of factors – the range of transaction values undertaken by a merchant, your card mix, the timing and extent of the credit interchange and MasterCard interchange changes (yet to be announced) and most importantly competitor strategy. Although this is an industry wide change, not all merchant acquirers will adopt the same re-pricing strategy and there will be plenty of differing approaches so shop around and find the best deals.
Here’s our thoughts as to what might happen purely for the Visa debit changes. It is important to stress that any merchant on “interchange plus” pricing (larger corporates) receives the benefit/cost of the changes immediately. Most SME’s in the UK market are not on interchange plus pricing but are on “blended pricing” thus the acquirer has complete discretion as to the extent to which changes are passed on :
- Scenario 1 – Acquirers pass on 100% of the changes – lower ATV merchants receive a price cut, higher ATV merchants receive a price increase. Seems unlikely as acquirers will not want to give away all of the interchange benefit to low ATV merchants and will not want to risk customer losses from the higher ATV merchants
- Scenario 2 – No change, acquirers take all benefit from low ATV interchange reductions and bear the cost of higher ATV interchange increases. Seems unlikely – with the average UK debit ATV currently at £48.38 (higher than the £35 ATV “break even” point) then across the whole market there is more interchange cost than benefit. The only reason for an acquirer to adopt a “do nothing” strategy and bear higher costs is if they dont want to re-price twice and want to see the impact of the credit card interchange reductions which will follow in H2 2015.
- Scenario 3 – Tactical re-pricing of some merchants – seems most likely.
- Lower ATV merchants would not be re-priced automatically unless they complain and look to switch (retention policy).
- Re-pricing for higher ATV merchants, where the acquirer only suffers marginal increased interchange, would be deferred until credit card interchange decreases take effect (Scenario 2) – the acquirer would then not pass on all of the credit card interchange reduction to cushion the higher debit interchange costs.
- Automatic re-pricing for higher ATV merchants where the acquirer suffers a material increase in interchange costs. Acquirer will stress that this is industry wide and that there is probably price reductions to follow later in the year so the merchant should not switch.
What should you do ?
It will come as no surprise to Cardswitcher followers that we advocate regularly checking your current card processing fees against the market and where cost saving arise then switch. The product is commoditised across the market and it is worthwhile locking in price reductions when you can, In particular in 2015 you should :
- Benchmark your pricing a little more regularly (click here for instant quotes from us)
- Pay careful attention to any letters you get from your merchant acquirer
- Speak to other businesses about what their merchant acquirers are telling them. Remember, not all merchant acquirers will follow the same strategy and customers will be treated differently depending on their card acceptance profile.
- Send us copies of your letters – we’d be happy to explain the impact, assess what you can do and share with other customers.