Warning: UK Card Processing Fees Change 2016

Card processing fees certainly had their ups and downs in 2015 and we had expected 2016 to be relatively quiet. Not so.

Later this year, Visa plans to remove the interchange cap on consumer debit fees, which will result in a significant fee increase for merchants with Average Transaction Values (ATV) above £245.

This will particularly impact businesses like garages, travel agents and other B2B businesses that sell other high value goods or services.

 

Current Visa debit charges

On 1st March 2015, Visa Europe changed its debit interchange rate from a fixed rate per transaction to a percentage-based fee.

  • Current rate: 8p
  • New rate: 0.2% + 1p

This resulted in significantly higher fees on all transactions above £35 and was a particular headache for merchants with high value transactions in the hundreds or thousands of pounds. For more information, please see our previous blog Warning: UK Card Processing Fees Change 2015.

To give some respite, Visa Europe capped their debit interchange fees at 50p for chip and pin with higher caps for business debit and CNP/non-secure eCommerce transactions.

Most acquirers passed on the benefit of these interchange caps in some form to their customers with high ATVs, either through interchange plus pricing or fixed-rate debit charges marginally above the cap.

Card/Transaction Type Cap Transaction Value at which Cap “kicks in”
Consumer debit (chip and pin/secure eCommerce) 50p £245
Consumer debit (CNP/non-secure eCommerce) £1 £495
Business debit (chip and pin/secure eCommerce) 75p £370
Business debit (CNP/non-secure eCommerce) £1.50 £745

 

Increases – from 1 September 2016

If your average transaction values are below the point the cap kicks in, September’s change is unlikely to impact you. We hope acquirers don’t use the change as a profiteering opportunity by increasing fees for lower ATV merchants as there is no basis to do so.

However, if you are a high ATV merchant, the price increase could be very important. Here are some examples for consumer debit chip and pin transactions, which previously all incurred only 50p of interchange.

Transaction Value New Interchange Cost Increase
£500 £1 50p (+100%)
£1000 £2 £1.50 (+300%)
£5000 £10 £9.50 (+1900%)
£10000 £20 £19.50 (+3900%)

 

Bear in mind that what we show above is the change in interchange costs, i.e. the cost that Visa levies on acquirers (WorldPay, Barclaycard, etc).

The acquirers then charge a margin on top of their interchange cost and that total (the Merchant Service Charge ) is what you, the merchant, pay.

The big question is:

To what extent will the acquirers treat this as a profiteering opportunity and pass on increases greater than the interchange increases?

In recent years, every time that interchange has changed acquirers have profiteered by passing on extra cost or not passing on the full benefit of reductions.

However, it would be a bold move to profiteer on the back of this change as we expect a large outcry from affected merchants.

After all, these are significant increases. For example:

  • A travel agent with an average transaction value between £500 and £1,000 will see debit processing costs double or quadruple. Businesses with even higher average transaction values,
  • A used car garage that sells cars for between £5,000 and £10,000 will see costs rocket by thousands of percent.

 

What to do?

There are a number of appropriate responses to the changes to card processing fees.

#1 Shop Around

All acquirers will incur an uncapped 0.2% cost so his will be the minimum charge you should expect to pay. Comparing providers takes around 2 minutes and can save you up to 40% on your processing fees. Click here to see how much you can save.

One merchant we helped who is currently with one of the market leaders has been told their debit fees will increase from 80p per transaction to 0.5% of transaction value.

Their ATV is ~£900 so their increase is £3.70 per transaction whilst their acquirer’s interchange costs will only rise by £1.30. That’s an additional profit of £2.40 per transaction for their acquirer had we not helped them switch!

#2 Surcharge Customers

While it isn’t particularly popular, a lot of businesses do levy credit card charges on their customers. As debit card costs are now approaching a similar level, customers are beginning to expect similar charges on debit card transactions.

The current surcharging legislation allows businesses to pass on their direct costs. However, this could change in the near future with an outright ban on surcharging Visa and MasterCard consumer debit and credit cards.

#3 Investigate Alternative Payment Methods

Clearly you have to opt for payment methods that customers want to use but there are more options out there.

Bank transfers are becoming more popular, offering faster payments under £10,000. Additionally, bank transfers can be free, almost instant and more easily accessible through mobile devices. The downside for customers is they don’t carry the same chargeback protection as credit and debit cards.

In the near future, we predict that alternatives such as Zapp, PayM and Pingit will gain much more consumer traction and emerge as real alternatives for businesses.

 

Want to Save 40% on your Card Processing?

Provide a few quick facts about your business & asee how much you could save

Get A Quote Takes 2 minutes
  • severn sea

    Obviously the rules won’t apply when we leave, but I thought the prices charged were an EU ruling, introduced in 2015 which capped credit card transaction fees at 0.3% and debit cards at 0.2%, brought in specifically to prevent this sort of thing? That was my understanding of it. I’m surprised to hear this.

    • Unfortunately the changes now being introduced are entirely within the EU guidance. The cap on debit interchange (50p – £1.50) which is now being abolished was a rule introduced by Visa itself to cushion the cost increases for large value transactions when debit moved to a percentage basis. This leaves debit interchange at a clean 0.2% which its within the EU guidance. It is unfortunate for merchants with large value transactions but entirely within the EU rules.

      Turning to Brexit and the impact on payment legislation, there are 2 points. Firstly the EU interchange caps have been adopted by the UK and are enforced by the UK Treasury (see https://www.psr.org.uk/psr-publications/news-announcements/PSR-issues-final-guidance-on-EU-payment-card-legislation) so these caps stand independent of the UK’s status in the EU. Secondly, on Friday the UK Payment System Regulator announced that all current EU payments regulation remains in force pending any contrary decision by the UK parliament (https://www.psr.org.uk/psr-statement-european-union-referendum-result). Given the likely timescale for Brexit, I think it is safe to assume that the interchange caps will remain in force until a minimum of 2019 and even then I would see it as highly unlikely that a UK government would decide to remove these caps, if in force throughout the rest of the EU.

      • Shaz0854

        I have recently booked a hotel in Krakow. The booking stated they could take a pre payment or all the payment at any time prior to my holiday. What I found they did (in order of transactions on my bank statement all on same day) they put a credit on my account which amounted to £871.58 at one exchange rate. Then they took it back again at a higher exchange rate costing me £879.58 + a non sterling transaction fee of £17.59. They then immediately took the money out again at the higher rate of £879.58 and I was charged another non sterling transaction fee of £17.59. Effectively the testing of my bank account cost me the difference in the exchange rate in the same day of £8.10 plus the £17.59 is this legal to charge this for just testing an account when you are going to take the full cost out anyway on the same day.

        • Sharon – we’re no experts on Polish commercial law. However, the fees levied are from your card issuer and are themselves perfectly legal. They are merely applying their standard charges to transactions originated by the hotel. The question is whether the hotel has done anything wrong as it is certainly strange to process then reverse then recharge a card in the manner you describe. If I were you I would challenge the hotel as to why they did this, advise the additional cost you have incurred and ask them for reimbursement. As I said, we cant comment on legality buy its certainly unreasonable for them to rack up unnecessary costs for you.

  • Pingback: More 2016 Visa debit fee changes - Cardswitcher()