A typical credit card transaction costs an SME business 81.5p to process and 14p for a debit card. How is this fee split between the card schemes, the card processor and the banks issuing the cards ? Who takes the lion’s share of card fees and who, if anyone, is on wafer thin margins ?
Who is involved in processing a transaction ?
A credit/debit card transaction is processed by 3 parties (click here for more detail):
- The card processor (eg Barclaycard, First Data, WorldPay, etc) who charge a “merchant services charge”.
- The card scheme (Visa or Mastercard) who charge a “card scheme fee”.
- The card issuer (eg RBS, Lloyds, Capital One, etc) who charge an “interchange fee”.
How much does each earn per transaction ?
Debit card fees are charged on a per transacion basis with a typical SME paying c.14p to accept a UK issued Visa debit card with chip and pin. Credit card fees are charged as a percentage of transaction value with a typical SME paying c.1.3% for a UK issued Mastercard personal credit card with chip and pin. With an average credit card transaction valued at £62.73 (UK Cards Association – click here) then a typical credit card transaction costs c.81.5p to accept.
A few observations
- At 81.5p, a credit card costs a staggering 6 times that of a debit card to accept.
- Mastercard and Visa only earn a few pence per transaction (card scheme fees), irrespective of whether it is a credit or debit card. They are often blamed for price increases, yet of all parties they earn the smallest fees.
- The jump in card issuer fees (interchange) for credit cards is largely due to the credit risk suffered by the card issuer for cardholder default.
- It is more difficult to rationalise why the card processor charges so much more for credit cards vs. debit cards. The capture, authorisation and settlement process is the same as debit cards and the card processor takes no additional credit risk. It is all additional profit margin.
- Transactions involving overseas issued cards and business cards or taken online/over the phone are more expensive in all the component parts.
Perhaps the most important takeaway is that when you think about your card fees, for most SME merchants the bulk of cost will lie in credit cards therefore the credit card rate is the most important cost aspect. Credit card purchases account for 30% of overall UK card spend (UK Cards Association – click here) but when you strip out the debit card heavy supermarkets, the proportion for smaller SME’s will be 50% or higher! And as you can see, its credit card fees where your card processor makes their high margin and has the most scope to negotiate!