Visa Europe and MasterCard Inc are commonly collectively known as “the card schemes” and are often tarred with the same brush. But there are differences in their ownership structures which are “interesting” when you consider their differing approaches in the UK to the EU cap on interchange fees. Whist MasterCard issuers are clear losers, Visa Europe have successfully minimised the impact on their issuers to the detriment of SME merchants.
MasterCard Inc is a US public company with a full listing on the NY Stock exchange (ticker : MA). It has shareholders (mostly institutional) and a board of directors like any other listed company such as Apple, General Electric or IBM. It operates worldwide, including Europe and UK, through its wholly owned subsidiaries.
Visa Europe is a non-public “co-operative” owned by its members, who are largely European banks and payment providers, and who total more than 4,000. It is a separate legal entity and has separate ownership, control and governance from Visa Inc in the US. It operates under a perpetual license from Visa Inc and is controlled by a Board of Directors which consists of 13 directors from the banks and payment providers and 4 independent/management directors. Noteably, Ron Kalifa (Deputy Chairman of WorldPay) and Valerie Soranno Keating (CEO of Barclaycard), who’s organisations control more than 65% of the UK acquiring market, are 2 of the 13 non-independent directors of Visa Europe. Other UK representatives include Royal Bank of Scotland, Lloyds and Nationwide Building Society.
UK business activities
Both organisations have complex and diverse trading activities but in essence they both license their brand to banks (“issuers”) to issue credit and debit cards and act as the middleman/regulator for merchant acquirers in processing payments on those cards. As such, banks play a funny dual role as both a supplier and a customer and in the case of Visa Europe they have an additional key role as owner and director.
Broadly, in the UK Visa currently dominate the debit market and co-branded c.95% market share of issued cards which, in 2014, undertook approximately 8.75bn transactions with a total value of c.£380bn.
MasterCard currently dominate the credit card market, co-branding c.67% market share of issued cards to Visa Europe’s 33% (excluding AMEX and other 3 party schemes). Whilst Visa and MasterCard set/regulate interchange rates, neither directly benefit from interchange fees on their co-branded cards which are paid to the card issuers. However, both have a large, commercial interest to maximise that interchange receipt on behalf of the issuing banks, who in the case of Visa Europe are also shareholders/directors!
EU interchange reductions
This is where it gets interesting. Both MasterCard and Visa Europe fall under the same broad rulings from the EU, albeit the detailed undertakings differ. The EU have sought to cap credit card interchange at 0.3% and debit card interchange at 0.2%, a move which is estimated to reduce overall UK interchange by c.£1 billion. The credit card cap represents a reduction of over 70% on existing credit card interchange rates whilst the debit cap actually represents a 33% increase on existing debit card interchange, based on an average transaction (£48.38).
The manner in which Visa Europe and MasterCard have reacted to the EU requirements is wildly different :
With the lion’s share of the UK credit card market, the EU changes hit MasterCard issuers worse in the UK (taking upwards of £700m of the reductions). In addition to reducing their consumer credit card interchange rates they have also had to remove the additional interchange charge from their premium cards like World and Insignia (0.45% – 0.6% further reduction). Furthermore they will apply the 0.3% cap not just to chip and pin transactions but also CNP and ecom transactions which previously carried an interchange premium. MasterCard have softened the blow to their issuers by phasing the reductions gradually from 1 April 2015 – 1 April 2016 which has displeased some retailers, but at least they will get the full intended benefit within the next 13 months.
MasterCard propose no changes to their few UK debit cards.
Contrast with the actions of Visa Europe.
On debit cards, Visa Europe didn’t need to take any action but decided to change the basis of charging from a flat rate per transaction to a percentage of transaction value. This has had the effect of increasing interchange and therefore increasing income to Visa Europe’s issuers (and members/owners) by upwards of £150m in the UK. Not only does the chip and pin rate on an average transaction increase by 2.7p (from 8p to 10.7p) but the premium on CNP transactions using CVV2 increases from 2.5p to 10p.
On credit cards, unlike MasterCard, Visa Europe has yet to make any announcement as to its intended interchange reductions. It has introduced its Visa Cross Border Domestic Interchange Program which gives access to a 0.3% credit card interchange rate but only for “secure” transactions and only for payment of a set-up and an annual recurring fee. These fees make the program uneconomic for SME’s, albeit larger retailers can benefit.
So what ?
So whilst, the monetary consequences for Visa Europe from the EU were less severe, its actions have done more to retain its interchange income (contrary to the EU intent) and increase costs to card accepting SME’s. The fees it is forced to concede on credit cards (eventually) will be materially compensated by its increases in debit card fees. One does wonder if the fact that its board of directors and owners are largely made up of card issuers who benefit from interchange income has anything to do with that?
And next time your merchant acquirer blames fee increases on Visa Europe, do remember if your acquirer is WorldPay, Barclaycard or Lloyds Cardnet that their senior people are the very Visa Europe directors who ratified the interchange increases.
Some of the public statements by these individuals will be difficult for merchants facing huge fee increases to understand. Ron Kalifa was quoted in CMSpi at a conference in London in September as saying that “whilst changes were made in good faith, Visa had not adequately thought about or understood the implications“. He described the changes as a “disaster” which did not add value to WorldPay adding that he had voiced his concerns in writing to various senior government ministers and regulators. Yet for many WorldPay customers, the disaster is further augmented by WorldPay’s fee increases in excess of interchange increases and the lack of a cap on Visa debit transactions.
Is it just me who is slightly cynical as to the motives of the acquirers and issuers who run and own Visa Europe ?