Warning : UK card processing fees to change in 2015

Volatile Mastercard Visa

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-debit-card-and-credit-card-e1309541715531Visa 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.

Slide1Clearly 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 :

  1. Benchmark your pricing a little more regularly (click here for instant quotes from us)
  2. Pay careful attention to any letters you get from  your merchant acquirer
  3. 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.
  4. Send us copies of your letters – we’d be happy to explain the impact, assess what you can do and share with other customers.

    Upload your fee increase letter

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  • Andrew Copeman

    Some great points Stephen, but I would also point out that the EU regulation also stipulates that schemes should bot take this as an opportunity to increase interchange. In many countries (Scandinavia, The Netherlands) interchange is low or zero for debit cards, and the European Parliament is very keen that this is maintained. But nevertheless, merchants should stay vigilant for any additional fees that might emerge!

  • Cardswitcheruk

    Yes Andrew, lower interchange is the intent but the consequence of the UK Visa debit changes in isolation will be higher interchange for transactions greater than £35. This isn’t speculation – Visa have already advised their members in writing in August of these changes and having spoken with acquirers this is what will be implemented. The expectation is undoubtedly that credit interchange will be reduced to compensate but neither Visa nor Mastercard have announced any change yet. And as you well know, lower interchange is all well and good but you need the acquirers to pass this on in lower MSC charges for merchants to benefit. One other lesser publicised change which should benefit merchants is a requirement for the processing element of charges to be disclosed in a transparent manner, distinct from interchange. This should enable greater comparability.

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  • Raffaele Losito

    Hi there, I havpe been getting different quotation around and I found out that payment sense is still offering a flat fees rate for signing up a contract for 5 years. Is it possible even knowing that visa is changing schemes ?

  • http://www.cardswitcher.co.uk/ Cardswitcher.co.uk

    Raffaele – a lot of providers havn’t yet advised their customers of what changes, if any, will be made (expect announcements very soon). PaymentSense resell First Data’s merchant accounts so they will be waiting for First Data to decide what price changes will happen. A lot depends on the transaction values you are processing. If below £35 then the interchange cost paid by First Data actually reduces on Visa debit so they may not change the pricing. If above £35 then their interchange costs increase and it is likely a price increase will be coming. PaymentSense offer a “guaranteed fixed rate” on transaction rates but when you read the small print you find that rate increases due to interchange are not included in the guarantee thus its pretty worthless. Our advice would be to ask PaymentSense to provide written details of what changes will happen before you sign up.

  • Al Smith

    I would be wary about changing anything now, as it is highly likely from 1st
    March the Visa Debit charges will change to align with the EU Regulations. I
    can’t imagine that the ISO’s will take on the cost of 0.2% of the transaction
    value, and potentially process the payments below cost… The contracts from
    any ISO will stipulate that any changes to the acquirer charges may be passed
    on, probably at 30 days notice (i.e after 1st March).

    Typically the small ISO’s do not make much profit on the rates, and they make it all on
    the terminal costs which will be a 5 year contract or similar. If you opt to
    cancel, you will have to pay the remaining terminal rental costs and any
    Minimum Activity Fees from the contract, which is something you would not
    encounter with one of the High Street Acquirers who typically sign you up to a
    12 month contract. I’ve been stung with charges of over £1000 to cancel the
    remainder of my terminal rental agreement from one of these Mickey Mouse ISO’s,
    and wouldn’t trust them again with my business!

    As is often the case in life, you get what you pay for. You have been warned.

  • http://www.cardswitcher.co.uk/ Cardswitcher.co.uk

    Thanks Al. We are already starting to see the ISO response on the Visa debit changes. So far, the ones we have seen are passing on only the incremental cost increase to customers. This is significantly less than the increases we have seen thus far from the “High Street Acquirers” such as WorldPay who have passed on the increase plus additional profit.

    As for terminal hire, while some acquirers will, at times, offer 12 month hire contracts, it is not their preference as they too would prefer a longer tie in, and their longer tie-ins also carry termination costs equivalent to the remaining rental over the minimum contract term. Like any rental contract, you will find that no matter who you are renting from, the longer the commitment you are prepared to make, the cheaper it gets. So businesses have to weigh up the chances of early termination and resulting cost vs. defined savings they will make on cheaper rates. Usually, you find that when you run the maths the savings outweigh the cost unless you are terminating within the first year. Unfortunate that you seem to have had a bad experience, but if you were to early terminate a rental contract with a High Street Acquirer then you would also face a termination charge. ISO’s are partners of the “High Street Acquirers” and are re-selling the same merchant accounts – only cheaper, so well worth a look!

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  • Craig H

    Can you please clarify that the charge for any one debit card transaction is being capped at 50p? World Pay have stated that there is no cap on their charges.

    • http://www.cardswitcher.co.uk/ Cardswitcher.co.uk

      Craig – what is capped at 50p is the interchange cost for Visa debit chip and pin. This is the cost which WorldPay pay to the bank which issued the credit card. WorldPay then add a margin to cover their costs and profit then charge merchants the sum of interchange + their margin (the Merchant Service Charge or “MSC”). What WorldPay are telling you is that their MSC which they charge you is uncapped. What they are not telling you is that their costs are capped at 50p hence anything you pay above that is contribution/profit for them. Shop around – there are providers who will offer capped rates to you on Visa debit. complete our online form and we’ll pitch them to you!http://www.cardswitcher.co.uk/2015/01/new-visa-debit-rates/

      • Craig H

        Thank you

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  • Nick

    Can you clarify the difference between Interchange fee and authorisation fee? I’m currently looking at 2 providers however they both have different authorisation fees of 2p and 3p per transaction and rates of .99% Barclaycard and 0.4% Netpay. As usual nothing is simple as Netpay want £4.99 per month as a PCI fee where BC is included I think and BCs min transaction fee is £20 per month with £10 per month terminal rental and Netpay is £15 pm min transaction fee but £11 per month rental. Seems to me I need to know number of transaction and ATV to find the best deal?

    • http://www.cardswitcher.co.uk/ Cardswitcher.co.uk

      Nick – in this context, interchange is a charge levied by Visa/Mastercard on Barclaycard and is calculated per transaction depending on transaction value, means of capture, type of card and country the card was issued in. Interchange is not a charge you bear directly (unless you are on interchange plus pricing which you almost certainly aren’t) but as its Barclays single biggest cost then it is a large influence on the MSC (merchant service charge) that they do charge you. Authorisation charges are a charge that Barclays charge you (as do most suppliers now at a rate of a few pence per transaction). It relates to their cost of obtaining an “authorisation” for each transaction. In terms of working out the “best deal” between your 2 options, yes you do need to cobble some estimates together re the value of transactions you expect to do and the debit/credit split. You can get better rates in the market – you can find debit at 0.2% + 10p (cheaper for transactions above £50) and with interchange plus pricing you will find credit at around 1.2%-1.3% currently, which reduces to 0.7%-0.8% on 9 December once Visa/Mastercard interchange reduction becomes effective.

  • Chris

    I’m currently in a 5 year contract, does this mean I can use this as a reason to get out of this contract and get a better deal elsewhere?

    • http://www.cardswitcher.co.uk/ Cardswitcher.co.uk

      Potentially. When your supplier advises you of a price change they will also advise if this triggers a contractual termination right (will be stated somewhere in your letter). You also have to enquire as to whether a price change on your merchant account will trigger a termination right on your terminal lease as they are 2 separate contracts.

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  • Barry

    I recently received a letter from my estate agents saying that the fee for paying my rent via my debit card has increased from 50p per transaction, to £2.50 due to a change in the European Commissions regulation. Is this true?

    • http://www.cardswitcher.co.uk/ Cardswitcher.co.uk

      It’s true that as a consequence of new EU legislation to cap fees, Visa Europe increased debit fees and these increases have been passed onto merchants (like your estate agent) by the banks and acquirers. They are permitted to surcharge to the extent of their card acceptance costs. A £2 increase does sound high, however we have heard from merchants who have faced similar levels of increases.

  • Keeran

    I have and online business and just joined Worldpay and they said my credit card charges for personal cards will be .9% plus online fee of extra .25%, for debit cards it is .3% plus 14p flat charge extra. Am I being over charged despite the new caps coming to effect? If business or premium cards, I could still pay as much as 2.1%. So, how is this cap saving me? Thnaks for your reply.

    • http://www.cardswitcher.co.uk/ Cardswitcher.co.uk

      Keeran – you ask a question we are hearing from a lot of merchants who are not entirely sure what the EU cap means for them. The cap became effective yesterday 9 December. However what the cap applies to is the “interchange” paid by WorldPay to the card issuer (via Visa / MasterCard). It does not apply to the end cost you pay despite what has been widely mid-reported. To what extent you benefit from the cap depends on WorldPay’s commercial decision as to how much of the benefit they pass onto customers and how much they keep themselves. What we are seeing in the market generally is acquirers like WorldPay are keeping the bulk of the benefit and only passing to customers on a “tactical” basis when they need to. Your quoted rates arnt that bad – not the cheapest available in the market but not materially above market average.

  • chris p

    We bank with RBS, when we asked for a Merchant Account they told us to talk to Worldpay (who they own). The Worldpay rep told us we had to take their Merchant Account – is this true? And they also said the Merchant Services Charge (1.47% CC and 0.73% DC) would be the same whichever payment gateway we use – again is this true? If so because we bank with RBS we have no choice… thanks for your advice

    • http://www.cardswitcher.co.uk/ Cardswitcher.co.uk

      Hi Chris
      WorldPay is no longer owned by RBS – it was sold in 2010 and is now entirely independent of RBS. With an RBS business account you can use any merchant acquirer – all of the mainstream merchant accounts will settle into an RBS business account (or any other mainstream UK business account), so no – what you have been told is not true. The rates you have been quoted by WorldPay are not the cheapest in the market but if you are a start-up then the rates are a lot to do with your sector, activity, credit rating so it’s difficult to be prescriptive about what rates you could get, but do shop around to see!! I am not too sure what WorldPay meant by the rates being the same whatever payment gateway you use? Merchant accounts are priced independently of the payment gateway being used which is charged separately – this would be the same everywhere unless you had a “bundled deal” where gateway/merchant account rates were combined. Maybe that is what they meant?

  • Pb

    So much for the myth that the interfering EU will help consumers , so far MasterCard have not altered their charging , despite all the offers to cardholders being removed starting some while back . Percentage debit card fees have actually resulted in our overall payment per month going up , so there will be no room to adjust our prices to consumers , mail order that is conveniently not classed as chip and pin type secure is being penalised further. The trouble with these bureaucrats is that they have no commercial nous and the card companies run rings round them.

    What I find really annoying here though is that everyone has been pushed down the debit card route as a way of replacing cheques , cheques were not charged on a percentage basis but a fixed cost per item. Cheque guarantee cards phased out because of debit cards and now we are having to pay percentage per transaction , we have been mugged .

    • http://www.cardswitcher.co.uk/ Cardswitcher.co.uk

      To be fair, Visa and MasterCard have reduced their pricing as they were legally forced to by the EU. The confusion arises because Visa/MasterCard charge the card processors/acquirers not the end merchants. So the acquirers/processors have seen their costs come down – the problem is they have not then passed these full benefits onto SME’s like yourself. So really its WorldPay, Barclaycard, Global Payments, First Data and Elavon that SME’s like yourself should be angry with – these are the ones profiteering from the EU changes at your expense..

      • Pb

        Thanks, I appreciate the differences , however , according to Elavon , Visa have come along with their new charging proposals and the result is percentage charge for debit cards and abolition of exception charges for premium cards along with the excuse that anything not secure as defined by them will not attract the cheapest rate IE anything outside chip and pin and the secured by Visa secondary screen coding for mail order transcation , will attract higher rates .

        They went on to advise that Mastercard had not decided what their charging response was to be so as yet Elavon have not passed on any lower rates for Mastercard .

        You are right , I am thoroughly dismayed with Elavon but have been since switching , its clear what their business model is , find anything that we can attach a flimsy excuse to for charging extra and they do , Ok I comply with all their requirements but you can be sure there are thousands that do not and get penalised for it , of course there are some such as authorisation call charging that you can not avoid .

        However its really the percentage debit card fiddle that really gets me going that is out and out robbery , these are electronic cheques and should be charged cost per item not percentage , this is where the EU have been really asleep and what I can not fathom is why there has not been more of an uproar about it , maybe you have a thought or two ?

        • http://www.cardswitcher.co.uk/ Cardswitcher.co.uk

          I appreciate your frustration and it is shared by many other card accepting businesses. Some of what you are being told is not correct or at best is out of date. MasterCard have already reduced their interchange – on 1 April 2015 they reduced interchange on premium consumer cards to the same level as non-premium and on 9 December they reduced all consumer credit card interchange to 0.3% (as did Visa on same date). So Elavon are now in a position to pass on these savings but choose not to. You are correct that there has not been the uproar there should be from regulators and trade bodies. I think this is for a few reasons – 1) the more vocal, larger businesses on interchange plus pricing are getting the full benefits on a timely basis leaving only smaller businesses out of pocket, 2) theoretically, even though debit has gone up, the net effect of all changes is to lower costs and I believe thats the way regulators/trade bodies look at the issue. What they are not yet seeing/realising is that in reality, the credit reductions are not being passed on by the acquirers/processors leaving SME’s with higher bills and SME’s have few effective lobbying routes to make their voices heard. You only have to read articles by for example the BRC to realise that they either don’t “get” the practical issue or don’t care as long as their larger members are happy. Similarly the FSB partner with WorldPay so its no surprise they havn’t been vocal on the subject.

  • Pb

    Sorry forgot to mention the other diddle of charging for the authorisation call plus the other fiddles Elavon try on of charging extra if the terminal isn’t insured on your policy , charging extra if your are not compliant , charging a 100 quid a year for some other spurious compliance , as a small business you can not challenge all this , and they are making out like bandits .

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