In 2019 there will be the first significant changes in interchange fees since the EU's 2015 intervention to cut consumer credit and debit fees. Some of these changes will be beneficial for merchants, some not. The first of these is the forthcoming August changes to business debit card interchange. Many merchants are now receiving an unwelcome increase in their business debit card processing rates.
What are business debit cards ?
A business debit card is no different to a consumer debit card. When you open a personal current account you get a debit card - well its no different for businesses. Every SME business in the UK with a bank account will have a business debit card, normally issued by Visa (MasterCard business debit cards do exist but are in the minority).
What are the business debit interchange changes
As a commercial card, business debit card interchange was out of scope for the EU's 2015 regulation which reduced consumer debit card interchange to 0.2% and consumer credit card interchange to 0.3% across the EU.
In 2015, interchange for Visa commercial debit cards was set at 0.2% + 1p for secure transactions and 0.2% + 11p for non-secure transactions. There was also a cap on the total interchange cap which was set at 75p for secure transactions and £1.50 for non-secure transactions. What this effectively meant was that secure transactions above a value of £370 didn't incur any additional interchange because the cap was reached (£695 for non-secure transactions).
The cap was introduced because prior to the 2015 change, interchange was a fixed rate per transaction and it was felt that the move to a percentage basis would be overly punitive for high transaction values. A £10,000 transaction using Visa commercial debit would incur interchange of £20.01 without the cap. With the cap, interchange is 75p.
The new charges increase interchange to 0.3% + 5p for secure transactions and 0.3% + 10p for non-secure transactions. For both types of transactions the cap jumps to £5.00.
|Old Interchange Rate
|New Interchange Rate
|0.2% + 1p (cap £0.75)
|0.3% + £0.05 (cap £5.00)
|0.2% + 11p (cap £1.50)
|0.3% + £0.10 (cap £5.00)
So now the cap doesn't kick in until the transaction value reaches approximately £1,650 as you can see below, where interchange costs maxes out at £5 as opposed to £0.75 under the old rates.
What price increases are acquirers passing on ?
The thing to remember is that interchange is paid by the acquirer to the card issuer (via Visa). It is NOT the amount you pay as a merchant to accept cards. This will be a totally different rate (the merchant service charge or MSC) and also includes card scheme fees, operating costs and of course a profit element for the acquirer (and is unlikely to be capped).
So now that interchange is increasing, the acquirers' costs are increasing so its only reasonable that merchants' MSC should increase......YES? And as you can see, interchange is only increasing by a maximum of 0.1% + 4p (plus the impact of the cap for high value transactions only). So merchants should not expect too much of a rate increase ? LOLZ...???????
Well, those of you that follow this blog know that will never be the case and that acquirers take every opportunity to profiteer from interchange changes by improving their profit margin. What follows is a great example from a WorldPay, the UK's (and world's) largest merchant acquirer and a price-setter in the UK market.
Example of WorldPay profiteering
We were contacted by a merchant who received a rate increase letter from WorldPay. This merchant is an online retailer selling mainly to trade, taking approximately £1million per year in cards with an average transaction value just under £300. A high proportion of their transactions are Visa business debit.
Prior to the increase they paid 0.447% for Visa business debit (the same rate that they paid for Visa consumer debit) on just over £47,000 of transactions (see statement extract below).
The increase passed onto the merchant by WorldPay took their Visa business debit rate to 1.816% (see below). This represents an increase of 1.369% or a four fold increase in their costs for Visa business debit!! This merchant is below the transaction value cap so WorldPay's interchange cost increase is a mere 0.1% + 4p.
This has a massive impact on the amount of additional profit that WorldPay makes on this merchant and a corresponding adverse impact on the merchant's cost base. Here's an illustration comparing WorldPay's profitability prior to and following the increase for just the £47,012 of Visa business debit cards accepted by this merchant in just one month :
|0.2% + 1p
|0.3% + 5p
|0.1% + 4p
The rate increase gives WorldPay an additional £643.60 of MSC income (which is the same amount the merchant's costs increases by). WorldPay's interchange costs have only increased by £53.37 so that gives WorldPay additional profit of £590.23. Its profit margin on Visa business debit increases from 120% to an astounding 473%.
How does WorldPay and other acquirers get away with this ?
In any other industry a four-fold increase in a customer's bill without a corresponding increase in the supplier's cost base would be unheard of. So how do acquirers justify this?
Rule 1 - blame MasterCard and Visa. Most merchants are sufficiently unfamiliar with interchange rules and changes that they'll accept this excuse at face value. Have you noticed that acquirers never provide details of the cost increases they have suffered and are passing on - the language is always woolly and non-specific. The other factor is that whilst interchange rates are publicly disclosed, scheme fees are not so there is no way for an ordinary merchant to evaluate if price rises are justified.
Rule 2 - confuse the card type. Business debit is often referred to as commercial debit and it is then very easy just to lump business debit in with commercial credit cards which everyone understands cost more than consumer cards. Few realise that whilst commercial credit cards carry interchange close to 1.4%, the interchange cost of business debit is closer to consumer credit and debit cards, ie 0.3%.
Rule 3 - hope your customers don't notice. Most businesses will not take a high proportion of business debit cards so this change may not add much to their overall bill. However B2B businesses whose customers are other businesses will take a high proportion of business debit and will be materially affected. Concessions can be made to that small element of B2B businesses whilst the majority of customers swallow the price increase.
What can you do to save on business debit ?
The answer is simple and the same as always.......
In their rate increase letter, WorldPay are keen to stress that changes impact all merchant acquirers, ie theres no point in looking elsewhere as everyone will be doing the same. That just isn't the case - we spoke with various providers and partners and the vast majority are pricing Visa business debit at only 0.1% - 0.2% higher than consumer debit. So there is value in shopping around and switching.