Visa debit interchange increases take effect in less than 2 weeks and will result in a cost increase for most UK card accepting merchants. WorldPay’s choice of pass through of these increases was not well received by many SME’s, but did it set a benchmark for the rest of the merchant acquiring market and what are competitors proposing? Heres a selection of fee increase letters you kindly sent us – what you will see is that there are subtle differences in approaches causing cost variances depending on your own card acceptance profile.
Whilst the changes affect the whole market, its not true to say “its the same for everyone”.
To recap, merchants’ biggest complaints tended to be around the lack of a cap whereby any transaction value above £245 was pure profit for WorldPay and also many merchants faced a percentage charge far in excess of the 0.2% + 1p interchange cost incurred by WorldPay. WorldPay seem to have structured their new Visa Debit charges purely as a percentage (ad-valorem) charge which in some instances was as high as 0.7% – 0.9%.
From what we’ve seen, Global Payments and their resellers seem to be setting their headline Visa debit fees at around 0.2% + pennies, with the pennies amount varying from merchant to merchant. Any penny rate that is any more than 7p less than your old Visa debit rate is additional profiteering for Global Payments and the extent will vary. It appears that some Global Payments merchants do have a capped rate and some merchants with high average value transactions have been offered a fixed rate for all debit transactions. So far, so good ? Where Global Payments can bury their additional charges is in their Interchange Differential Fees (or “IDF”, click here) which are extras over and above their headline chip and pin rates. To the extent these extras represent recharge of additional interchange costs that Global Payments suffer on other card/capture types then fair enough (albeit it is mighty confusing for customers and muddies the water for comparison) ? Whats interesting for this round of fee increases is that Global Payments have chosen to increase their IDF by more than their cost increases. Sneaky?
A typical IDF table runs to over 300 different fees and can quote rates to 4 decimals so your average merchant is unlikely to take notice of increases. Some examples – Visa debit CVV2 transactions used to incur interchange of 10.5p, compared to 8p for chip and pin and Global Payments would charge an IDF (“VDC CVV2”) of 2.5p which equalled interchange so no additional profit. Now Visa have changed the chip and pin interchange rate to 0.2% + 1p and the CVV2 rate is now deemed non-secure and incurs interchange of 0.2% + 11p, ie an extra 10p per transaction. As you can see in the table above, Global Payment’s IDF has now increased to 0.0025% + 12.75p so equates to additional profit above their costs of 0.0025% + 2.75p per Visa debit non-secure transaction. Similarly Visa credit cards taken when the customer is not present now earn additional profit of 0.0025% (CVV2) and 0.0255% (MOTO) above their interchange differential costs. Sounds small, but it all adds up!
Cardnet merchants seem to have incurred a fee increase structured in a similar manner to WorldPay, ie a percentage of transaction value without any cap for higher transaction values. But there are some subtle differences which could give rise to material cost differences vs. the WorldPay approach. Firstly in what we have seen is that the percentage applied seems to be far lower (0.29% in the example opposite). Secondly, in this instance, the rate quoted applies to both secure and non-secure transactions, whereas WorldPay would charge an additional premium of 14 pence for non-secure. Thirdly, we did speak to a Cardnet merchant whose rate had been revised to only 0.1% which is below interchange cost for transactions lower than c.£500. Whilst this merchant would have preferred a cap, the low rate did to some extent compensate for this.
First Data also seem to be following the WorldPay format of charging a percentage for visa debit transactions. In the example opposite the percentage of 0.562% gives First Data a 180% mark-up on interchange costs which is pretty high. Theres also a further charge of 0.363% for any non-qualifying transactions whilst First Data’s additional interchange cost would be 10p – if you do the maths, First Data makes further profit on any transactions above £27.55.
First Data have also taken the opportunity to introduce a 3p authorisation fee for this merchant and undoubtedly other merchants. This is not driven by regulatory change and is pure profit for First Data as they have always had the costs of providing authorisations which is paid for from your per transaction rate.
Allied Irish Bank
AIB’s approach has been similar to Global Payment’s but without the additional profit elements. They have also repriced on a 0.2% + pennies basis, with the pennies being variable from merchant to merchant but generally reflecting similar profit margins prior to the change. All merchants we have spoken with have also been offered the interchange cap. For some higher value merchants, some AIB reseller’s have also been passing on card scheme fees at around 0.015% + 1.5p. Global Payments also currently do this and with the likely prospect that Visa and Mastercard will increase the fees they charge to merchant acquirers in 2015, we would expect more and more acquirers to begin to pass this cost on.
Barclays and Elavon
No notifiction letters as yet. We understand Elavon will announce their approach before April but Barclays have been deafeningly silent. As both a major card issuer and acquirer, interchange costs are almost an “inter-company” item to Barclays and they can afford not to rush changes and evaluate market response to competitors’ actions before acting. It is inconceivable they will not at some point re-price in line with the rest of the market, but who knows when. If this risk is unacceptable, then do ask for written confirmation of no future visa debit changes before you sign up. Barclays also already price some SME’s at 1.5% on Visa debit so increases are unnecessary – they are already overpaying!
Other Resellers / ISO’s
By the very nature of the supply chain, the ISO’s need confirmation from their merchant acquirer as to the proposed changes before they can advise you. As you can see from above, many acquirers have not yet reached a firm position and even some of those acquirers who have a firm position, have not fully negotiated the deal with their ISO’s. Some ISO’s can already give certainty on future rates, some genuinely don’t know yet (and will be upfront with you about this) and there are some others who are “in denial” about future changes. We heard from one merchant (a garage) who was told by a sales person from a large ISO that there would be no future visa debit increases and the rates on offer were “fixed” for 3 years. We advised the merchant that everyone would be impacted by visa debit increases and in this industry, no SME gets fixed rates, but that they should request the offer in writing if they want to proceed. Needless to say he ISO’s head office were unable to verify the sales person’s claims and Cardswitcher subsequently placed the merchant with one of our partners.
With any ISO or merchant acquirer, do have an upfront conversation about how visa debit changes will impact because no-one in the market will be immune.
As we’ve said before be careful of anyone, and particularly an ISO, offering fixed or guaranteed rates. PaymentSense used to make a big play of this claim but lately have relegated or even removed this from its website. Most merchants would have failed to read the small print which notes that the guarantee doesn’t apply to industry wide changes, such as this visa debit increase. PaymentSense themselves acknowledge that they don’t know what increases will be applied by First Data (their acquirer) to PaymentSense customers but given First Data is busy re-pricing its own customers (see above) then it seems inevitable there will be an impact.