So 9 December has come and gone and the EU interchange caps have taken effect but most SME merchants are left wondering what does this mean for me and why am I not seeing a material reduction in my card processing costs?
Theres a lot of it about, whether its lazy journalism or ignorance I don’t know. If you clicked on the Sky News website this week you would have thought that SME’s were being handed a bumper cost reduction but that simply isn’t the case. Sky News reported that “The EU has imposed a limit on how much card companies can charge retailers to use electronic payment systems” which is just factually inaccurate.
Even Helen Dickinson, CEO of the British Retail Consortium who should know better is often quoted talking about “card fee caps“. No Helen, its not a card fee cap, its an interchange cost cap!! Very, very different. Its no wonder, we’ve had quite a few emails from “disappointed” merchants who had expected a windfall, which just didn’t materialise.
The EU legislation – a re-cap
Card processing fees paid by merchants or Merchant Service Charge (“MSC”) are not being capped. Acquirers and processors are still able to charge whatever they want or can commercially “get away with”.
What is being capped is “interchange rates”, at 0.2% debit, 0.3% consumer credit (commercial cards remain uncapped). Interchange rates are costs paid by acquirers/processors to card issuers and are set by Visa/MasterCard.
Most SME merchants are on “blended pricing” – when interchange changes, there is no knock-on effect on their MSC unless their acquirer/processor chooses to pass on the change – it is not contractual. Larger merchants are on “interchange-plus” pricing and there is a direct contractual link between their MSC and interchange rates. When interchange moves, their pricing moves automatically so large retailers did receive a material MSC reduction on 9 December thanks to the EU.
Whats happening in the market ?
You will recall what happened a year ago when Visa changed its interchange costs from 8p per transaction to 0.2% of transaction value? This meant a cost increase for most merchants. Acquirers and processors went into overdrive with mass mailings in December and January to hundreds of thousands of customers to be ready to pass on the increase as soon as it became effective on 1 March.
However, 1 year on and when it comes to passing on benefits, the same acquirers have been notably silent and almost none of them have made any portfolio wide price adjustments. I say almost none, because we have seen some movement from Barclaycard who have bizarrely increased prices for some merchants and Global Payments who are passing on reductions but not in full. One processor who has implemented portfolio wide reductions is Stripe who only this week reduced their UK rates to 1.4% + 20p for all cards. Stripe is still expensive vs. traditional e-commerce merchant accounts but it’s a significant move that puts clear daylight between Stripe and its main e-commerce competitor, Paypal, who continue to offer rates at a ridiculous 3.4% + 20p for smaller micro merchants. Surely this has to change soon in Europe?
Its not unexpected for the processors and acquirers not to immediately pass on the interchange benefit. All of the main UK acquirers (WorldPay, Barclaycard, First Data, Global Payments, Elavon) have previous form on this. For example in the US following a similar law in 2011 (the Durbin Amendment) which capped debit interchange, SME’s saw no or little benefit as these same acquirers kept the lion’s share.
Baird Equity Research published an interesting research note this week on the Interchange Legislation in which they quantified the financial upside for Global Payments who are one of the main card acquirers that they cover. They estimated that Global Payments earnings would be enhanced by 1.6% in 2016 from the upside of the EU interchange benefits not passed onto merchants. Might not sound a lot but 1.6% translates into a profit uplift of $7 million per year (£4.7 million) for Global Payments. Global Payments has a relatively small share of the UK market which is dominated by WorldPay and Barclaycard (combined market share greater than c.80%).
If you were to extrapolate Baird’s $7 million calculation for Global Payments to the entire market then I would not be surprised if you arrived at a profit of around £100 million, which is being retained by acquirers and not passed onto SME’s. And it is just SME’s who are losing out because the larger retailers all receive their rightful share of the upside because of their “interchange plus” pricing. The British Retail Consortium estimate that the interchange upside for UK retailers is worth c.£480m per year. Over half of this upside falls to larger retailers on interchange plus pricing who automatically receive the upside. The remaining c.£200 million, or there abouts, should fall to SME’s who are on blended pricing. The extrapolation above therefore implies that acquirers are only planning on passing on c.50% of the benefits to SME’s and its worth noting that this wont happen immediately but will be bled out over years. If anything, this could be overstating the benefits for SME’s – in practice we have seen some SME’s receiving only 42% of the upside.
The US experience shows that it will take the best part of a decade for SME’s to get full benefit of the interchange reduction and even then its difficult to prove because of the “noise” from other pricing adjustments.
Today, its very obvious that a huge chasm has emerged when it comes to rates for “switchers” vs. rates for existing customers. Acquirers are only giving away the upside to existing customers on a tactical basis when they really have to. On the flip side they are only too happy to use the upside to attract switchers with low rates. So the message for SME’s is very clear – if you want to be sure of your share of the EU reductions then you have to be prepared to switch. Click here for instant quoters now.