WorldPay fails to pass on full EU interchange reductions

Christmas should be season of goodwill to all, so why are merchant acquirers acting like Scrooge at Christmas?  WorldPay has become the latest merchant acquirer to fail to pass on the full 0.5% EU reduction in consumer credit card interchange to its customers.  WorldPay began writing to customers on 7 December advising of rate reductions, which sounds great and very welcome in tough economic times.  But merchants who have realised that WorldPay are only passing on a fraction of the EU reduction are furious at being short-changed.

The EU credit card cap legislation

Every merchant in the country must be familiar with this EU legislation by now?  So its a mystery why WorldPay and other acquirers believe they can use the benefits to boost their own profits rather than pass savings onto their customers as the EU and the UK’s Payment Systems Regulator intended?

To summarise the basic changes :

  1. As of 9 December, the EU capped interchange payable from merchant acquirers to card issuers to 0.3%, ie a massive reduction of 0.47% (Visa) and 0.5% (MasterCard)
  2. Large merchants on “interchange plus” pricing receive this benefit immediately (contractual)
  3. Smaller merchants on “blended pricing” have no contractual entitlement to the reduction and are dependent on the goodwill of their acquirer to reflect these savings in the rates they pay
  4. Interchange costs for card not present and e-commerce transactions were also capped at 0.3%, removing those hidden extras previously paid for non-chip & pin transactions

What has WorldPay done ?

When WorldPay increased debit rates at the beginning of the year, they tried to soften the blow by telling customers that a big credit card rate cut would follow later in the year.  Until now they have been silent as to the quantum or timing of these decreases, as a carrot to existing customers to stick with WorldPay, despite the fact that WorldPay has known since July (when they were advised by Visa and MasterCard) exactly what these reductions would be.

So on 7 December WorldPay customers began to receive letters advising them of rate reductions – surely this is great news?  Unfortunately not, as the decreases are nowhere near what customers could have expected and nowhere near the cost reductions that WorldPay are receiving and choosing not to pass on.

worldpay letter

We’ve heard from a few merchants who’ve kindly sent us their WorldPay letters.  These are not small merchants and the examples shown below are from 2 merchants taking £5m-£10m of cards per year.  If this is the extent of the upside for larger SME’s then we would expect the proportion of benefits passed on to smaller merchants to be even lower.

Consumer Credit Cards Headline Rates

In the table below we’ve blended the MasterCard and Visa consumer credit rates and interchange for simplicity.  Whilst the EU has gifted WorldPay a 0.49% reduction in its interchange costs, the MSC rate reduction passed onto the 2 merchants below is only 0.16% and 0.18%, ie broadly 1/3rd of WorldPay’s total benefit.  The remaining 2/3rds of the benefit is retained by WorldPay, boosting its profits.  WorldPay’s profit (before scheme fees and other operating costs, both relatively immaterial) on consumer credit cards for each of these merchants has broadly doubled :

Merchant 1 MSC Merchant 2 MSC WorldPay interchange cost

Rate (old)

1.075% 1.18% 0.79%

Rate (new)

0.915% 1.0% 0.3%

Saving

0.16% 0.18% 0.49%

 

WorldPay profit (old)

0.285% 0.41%

WorldPay profit (new)

0.615% 0.70%

Increase

215% 175%

Other changes

sledge and reindeers

WorldPay’s profiteering doesn’t stop there :

  1. WorldPay’s letter advises that the merchant rate changes take effect on 1 March 2016.  This is approximately 3 months after the EU reductions occurred on 9 December and WorldPay keeps 100% of the EU reduction for this period.
  2. As an interim step prior to the EU reduction on 9 December, MasterCard voluntarily reduced interchange on its World Signia cards from 1.4% to 0.8% on 1 April 2015.  For a number of merchants, WorldPay is only now passing on that benefit having kept it for itself for 11 months.  There are millions of these cards in circulation in the UK so this is not immaterial.
  3. Card not present and e-commerce credit card transactions were previously subject to a premium of up 0.3% by WorldPay.  This was fair enough when the CNP/e-com interchange costs were higher than chip and pin interchange costs by broadly the same 0.3%.  But since 9 December there is no interchange premium on these transaction types for consumer credit cards yet WorldPay seem to be continuing to charge the same premium.  Granted scheme fees are marginally higher but this is relatively immaterial.
  4. MasterCard debit card transactions are now being charged as a percentage of transaction value (same as Visa debit) rather than their previous fixed pence per transaction.  That seems reasonable given MasterCard have changed their interchange cost from 8p to 0.2%.  However, the percentage rate being applied by WorldPay includes an additional profit element for WorldPay in he same way it profiteered from the Visa debit increases.  Merchant 1 above  see’s its MasterCard debit charge increase from 14.5p per transaction to 0.495% of transaction value.  This increase is far more than the increase in interchange and WorldPay’s profit per transaction (£42 ATV) now increases from 6.5p to 12.4p per transaction, ie almost doubles!

Finally, in the small print of the letter, merchants might not have noticed a small sentence notifying them of a change in their Terms & Conditions which they will be deemed to have accepted after 60 days.  There is too much to comment on so we will save it for a later post but suffice it to say any T&C’s which run to 36 pages long are not designed to be favourable to the merchant.  Merchants would be wise to read these new T&C’s very carefully as they substantially shift risk and liability away from WorldPay towards the merchant.

What next ?

tree

WorldPay advise that merchants have 60 days from the date of the letter during which they can terminate their WorldPay merchant account at no cost if they do not wish to accept the new terms.  Of course, this is slightly duplicitous in that merchants would still incur a termination cost on any terminals hired from WorldPay that are within their minimum contract term.

Notwithstanding a potential termination penalty, merchants would be well advised to shop around because there are plenty of other suppliers willing to pass-on more of the EU reduction to new customers/switchers.  The pricing gap between non-switchers and switchers is now at an all time high demonstrating there is no financial benefit in staying loyal to an acquirer/processor over the long term.  They merely interpret this as an indication that you are unlikely to leave and therefore a soft target for future rate increases.

Finally, its unclear whether the UK’s new Payment Systems Regulator is interested in or has the remit to look at the extent to which the EU reductions are being passed onto SME’s.  They really should look at this as should other business organisations which claim to champion the interests of their members – the British Retail Consortium and the Federation of Small Businesses surely have to speak out at this unfair treatment of SME’s which furthers their competitive disadvantage to their larger counterparts who have received the full EU reductions under interchange plus pricing.

 

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  • Hugo Godschalk

    Stephen, thanks for this great article with interesting insights. However, the disadvantage for small merchants with no contractual entitlement to the IF reductions by a IF++-contract is only temporary. Based on Art. 9 (& Art. 18) of the IF-Regulation 2015/751 all merchants can apply for such contracts as alternative for the usual blended fee pricing at least from 9 June 2016 onwards. Based on our experience, acquirers are already offering such contracts before on demand of the merchant today.

    • Thanks for your comments Dr Godschalk. I would have to disagree with your thought path that the IF Reguation will automatically give small merchants access to lower fees through the right to demand IF++ (IC+ or interchange plus or plus pus) pricing as of June 2016. As a small merchant, the window to ensure you got the full benefit of IC reductions was pre 9 December 2015. Merchants who managed to transfer to an IC+ contract prior to that date automatically received the full benefit of the reductions in consumer credit card IC (0.5% on chip & pin and the abolition of non-secure fees). Merchants who subsequently transfer to IC+ contracts with their existing provider will effectively “lock-in” their blended pricing and receive no/little benefit from the historic step change in IC. For example if you are currently paying 1.0% on consumer credit cards under blended pricing and you now successfully transfer to IC+ pricing, the rate on offer from the merchant acquirer will be IC (0.3%) + a margin of 0.7% (maybe a small discount). I’m afraid the ship has now sailed for small merchants looking to benefit from IC reductions – as we can see from multiple examples, certainly in the UK market, acquirers are passing on only c.1/3 of the benefits to existing customers. If you want the full benefit, you have to be prepared to switch. The onset of access to IC+ billing will certainly give more visibility on merchant acquirers’ margins and that will result in some price erosion but I suggest it will be minimal. One only has to look at the US precedent following the Durbin Amendment in 2010 – merchant acquirers retained the majority of the benefit of debit interchange caps and only slowly and tactically bled price reductions into the market (they havn’t fully passed on even today – 6 years later!). So, whilst I welcome greater transparency from IC+ billing, in itself it will do little to ease pricing for smaller merchants.