On 1st September Visa will reduce interchange on UK consumer debit cards by 1p and will remove the additional non-secure fee of 10p per transaction which applies to card-not-present transactions and non-secure eCommerce transactions.
This should be good news for all card accepting merchants but especially for merchants who accept card payments over the phone or online without using 3-D Secure.
But the big question is:
Will merchant acquirers pass on reductions to their customers or will they pocket these benefits for themselves?
A recap on the recent history of Visa debit pricing
Prior to March 2015, Visa’s UK interchange charge for debit cards was 8p (chip and pin) and a few pennies higher for eCommerce and CNP.
- Chip and pin: 0.2% + 1p
- CNP/non-secure eCommerce: 0.2% + 11p
A lot of people rightly asked why Visa could add on an additional 1p/11p if the EU cap was 0.2%. This is because the EU cap is determined based on the average interchange across all Visa debit transactions in the entire country.
Visa also introduced an interchange cap of 50p for chip and pin, £1 for non-secure and slightly higher caps for Visa Business debit.
For high value transactions (anything above £245 on chip and pin), the interchange was capped at 50p and the effective rate was less than 0.2%. That dragged down the average rate across the country and made room for the additional 1p/11p fee to be added and still remain within the overall 0.2% cap.
There was a lot of merchant disquiet over these changes because, for the majority of transactions, the change represented an increase, on top of which most acquirers added additional margin.
Revised interchange fees as of 1st September 2016
On 28th April 2016, Visa announced to its members that UK consumer debit rates were to change:
- 0.2% for all transactions
The new rate would come into effect on 1st September 2016. The 1p/11p charge for secure/non-secure transactions will be dropped, which should result in a fee reductions for all merchants.
On the negative side, the 50p/£1 cap will also be dropped, which is incredibly bad news for merchants with high average transaction values who will see a significant fee increase. We cover this in more detail here.
|Card/Transaction||Current Interchange||Revised Interchange|
|Consumer debit – secure||0.2% + 1p (50p cap)||0.2%|
|Consumer debit – non-secure||0.2% + 11p (£1 cap)||0.2%|
The revised interchange applies to all merchants with the exception of a minority of financial and government institutions that can still benefit from caps if they meet certain criteria.
Interchange on Visa business debit transactions is unchanged at 0.2% + 1p (75p cap) for secure transactions and 0.2% + 11p (£1.50 cap) for non-secure transactions.
How much will acquirers pass on?
Experience tells us that we should be sceptical about whether merchants will ever receive much benefit from the removal of the 1p/11p interchange. Of course, larger merchants on interchange plus pricing will see full benefits immediately on 1st September 2016. SMEs on blended pricing will inevitably get stung.
However, the impact will be very real for higher value transaction merchants, who should expect to bare the brunt of the higher costs from the interchange cap removal.
Reduction of 1p on secure transactions
It’s simply too much hassle for merchant acquirers to write to all their customers to notify them of a 1p reduction so we don’t expect any merchant acquirers to pass this onto existing customers. However, most will pass it onto new customers to entice switches.
Yet again loyal customers who don’t switch will be penalised. The only way acquirers will pass on the reduction to existing customers is as a retention incentive or as part of a parcel of other upcoming changes.
You might think the 1p reduction isn’t worth worrying over but for the average £42 debit transaction a retailer might be paying a fee of 0.35% or 14.7p. Not receiving the benefit of the 1p reduction is akin to a 7% fee increase — definitely something you would rightly complain about!
Reduction of 11p on non-secure transactions
The extent to which acquirers pass on any benefit to merchants will vary across the market. Some larger SMEs with high CNP volumes may well see the full benefit but I’m willing to bet they will be in the minority and almost all acquirers will seek to profit from this change.
You only have to look at the varying level of additional fees that each acquirer currently charges for non-secure Visa debit transactions! Bear in mind that the current interchange cost to the acquirer of a non-secure Visa debit transaction is the same for all at 10p.
Here’s what the main acquirers typically pass onto SME customers along with their profit margin at the moment.
|Acquirer||Debit non-secure fee||Profit per transaction (margin)|
|Global Payments||0.1% + 11p||5.2p (52%)*|
|First Data||nil (same rate as secure)||nil|
|Lloyds Cardnet||nil (same rate as secure)||nil|
|Allied Irish Bank||10p||nil|
* calculated on a £42 debit transaction (UK average)
We are fairly confident that a number of the acquirers will seek to maintain a non-secure fee even though these transactions do not cost them any more than a secure transaction.
This is exactly what has happened with other card types when non-secure interchange fees were removed.
Other than Visa debit, only MasterCard’s commercial credit cards currently incur a higher interchange cost for non-secure vs. secure transactions. Yet a number of the acquirers above still charge for non-secure transactions on consumer credit cards despite the interchange penalty being removed in 2015.
Acquirers may argue that non-secure transactions carry additional costs other than interchange (for example higher instances of fraud) but in reality this should add only a few basis points to cost, if not already priced into other rates.
What to do?
Regular readers will be familiar with our mantra by now but, as you can see, it is essential you shop around to get the best deal.
When 2 minutes can save you up to 40% on your processing fees, it’s simply not something you can ignore for any longer. Click here to get started.