Another January and yet another card processing fee increase from the acquirers. Why this time?
What are card scheme fees?
Card scheme fees are a cost to your acquirer and are taken into account when setting the merchant service charge (MSC) rate they charge you for each transaction.
MSC rate = interchange + card scheme fees + acquirer profit
We all know what interchange is by now (click here for a reminder) but less is known about card scheme fees. Interchange rates are publicly published and in Europe are highly regulated by the EU. Card scheme fees, however, are not publicly disclosed and are unregulated.
The calculation of Interchange is relatively simple compared to card scheme fees. Interchange is set as one rate per card type with variants if the card is non-UK issued or is accepted without chip & pin.
However, card scheme fees are made up of a myriad of different charges, including:
- variable fees per transaction : dependent on card type, geography and acceptance method
- fixed fees, unrelated to any transaction: some of which are dependent on the acquirer volume processed and card scheme services used by the acquirer
This makes it nigh on impossible for a merchant (and some acquirers) to work out the scheme fees applicable on any given card transaction.
So how much are card scheme fees now?
Card scheme fees don’t make up a huge proportion of the total cost of card processing, approximately 0.02% of the transaction value for Visa cards and 0.04% for MasterCard cards. So much lower than interchange as you can see from the example below for a £50 UK chip & pin transaction :
Interchange: 10p debit; 15p (consumer credit)
Card scheme fees: 1p (Visa); 2p (MasterCard)
However, as any increase is ultimately passed on, merchants should take an interest when the card schemes hike their fees. The January increases equate to roughly 20% for chip and pin and around 40% for CNP and eCommerce transactions. Visa debit transactions which have gone up by considerably more — up to 100% in some instances (see below).
Why have they gone up ?
Card scheme fees in the EU are considerably lower than the equivalent fees in the US and card schemes identified a clear opportunity to extract value from EU merchants. It was widely speculated (and confirmed by Visa’s CEO Charles Scharf) that this is exactly what would happen when Visa Inc acquired Visa Europe last year. And with most eyes on the EU interchange cost reductions, now was the perfect time to hike up other fees.
The card schemes also have higher costs following EU legislation, which forced them to separate their brand and processing activities into separate business units.
Ballooning Visa fees
We noted above that Visa debit has seen the largest percentage increase in card scheme fees. This is because acquirers used to receive a sizeable rebate from Visa based on their volume of visa debit transactions processed.
Part of the deal when Visa Inc acquired Visa Europe is that this rebate would be scrapped, thereby increasing the cost of card scheme fees for processing Visa debit transactions.
The rebate wasn’t insignificant either — quite the opposite! In the case of the UK’s largest acquirer WorldPay, analysts estimate it to be around £20 million per year.
So perversely, the larger the acquirer, the greater the volume of visa debit transactions processed, the larger the rebate and the larger the cost passed onto merchants. For example, a WorldPay merchant should expect to see larger fee increases than say a Lloyds Cardnet merchant.
Acquirers didn’t need to pass on the cost of losing this rebate. Part of the cash they received from the sale of their shares in Visa Europe was to compensate them for losing the rebate. WorldPay, for example, received £1.2bn for its 6% share and around one-third of that would be compensation for loss of rebate.
So this is truly a case of acquirers having their cake and eating it. Visa compensated them and they also increased costs for their customers!
Profiteering by acquirers?
Every time there is an increase in interchange or card scheme fees, we see the acquirers use it as an excuse to increase their fees (with a little extra on top) to boost their own profits.
We’ve seen a mixed bag this time. Some acquirers have passed on a few basis points, reflecting their own card scheme fee increases. Others have passed on considerably more.
One WorldPay merchant who sent us their increase letter in October saw their debit card rate rise from 0.37% to 0.47% — 10 basis points increase! Their credit card increase was even worse, rising from 0.7% to 0.86% — a 16 basis point increase!
Whilst WorldPay will have experienced a larger scheme fee increase than other acquirers, the increase passed to the merchant above seems far in excess of their cost increase. On their website, WorldPay themselves attributes the increases to both card scheme fee increases and also “harmonisation” of their pricing structure – a code word for profit?
What should you do?
Most acquirers advised merchants of the increases late last year with increases taking effect on 1st January 2017.
In all likelihood, you won’t notice the increase until your February bill, but when it arrives do scrutinise it. If the rate increase is more than a few basis points (0.02%), your acquirer is probably making additional profit from you.
Don’t put up with it. There are better deals available in the market, all you have to do is shop around.