When the European Interchange Fee Regulation (IFR) was introduced at the end of 2015, it was regarded as a victory for merchants in the long-fought battle for fairer interchange fees. The new regulation has imposed caps on both debit and credit cards of 0.2% and 0.3% of the transaction value respectively which, in theory, should result in substantial savings for merchants – with key players Visa and MasterCard forced to impose significant reductions of 50% on average to their existing interchange fees across the EU. Indeed, CMSpi estimated that the IFR could save UK merchants as much as £650 million per annum.
Despite this, it is likely that many merchants will be unable to enjoy the full benefits of the changes. Not only are there exceptions to the IFR (not all card transactions are included and a number of card types, such as MasterCard and Visa commercial cards, are exempt from the new caps), it is expected that there were will be a number of developments in the wake of the IFR that will mean that many merchants fail to receive cost-savings of any significance.
First and foremost, it is believed that acquirers may not (intentionally or otherwise) pass on the savings in their entirety to merchants. Not only was this witnessed in Australia and the US following the introduction of interchange regulation, there is evidence to suggest that UK merchants have already been short-changed. Indeed, 2015 saw plenty of changes to the UK’s interchange fee structure even before the IFR caps were introduced in December 2015. These include the Visa Cross-Border Domestic Interchange Programme (VCBDIP) from January 2015, changes to Visa’s domestic UK debit card interchange fee structure in March 2015, and stepped reductions in MasterCard credit card interchange fees in April 2015 and September 2015. In all of these instances, we have observed many cases where a significant proportion of the savings due to merchants have been withheld. This is likely being repeated following the IFR’s implementation in December.
The failure by acquirers to pass on IFR savings can occur in a number of ways, but the primary reason is due to a lack of clarity around pricing, with those on blended pricing structures most likely to be affected. Such structures combine all the various elements of a transaction fee into one charge, making it particularly difficult to determine details of specific fees – and thereby, whether interchange pricing has been fully adjusted in line with the new caps.
As part of changes being introduced in 2016, acquirers will be obliged to offer merchants alternative, more transparent pricing options. While this would suggest that this is a straightforward “fix” to the injustice of withheld savings, as is often the case with card fees, it is not that simple. Indeed, merchants must be wary of acquirers inflating scheme fees and margins as part of the transition to the new pricing structures. It is therefore crucial that merchants are proactive; seeking advice and having a comprehensive understanding of their costs if they are to feel confident that they are receiving the full benefits of the new regulation.
Not only are merchants at risk of not receiving all the savings IFR should bring, they also face being hit with new fees as acquirers seek ways in which to claw back lost revenue. MasterCard has already outlined four changes, including the “dispute administration fee” of €15 fee per chargeback raised. This behaviour has also been witnessed in the US post-interchange regulation, where ambiguous titles such as “application fee”, “management fee”, “transaction fee” and even “kilobyte” fee were brought in. Certainly, it would appear that the IFR is acting as a catalyst for the introduction of so-called “replacement” fees.
The upcoming acquisition of Visa Europe by Visa Inc. is a further blow. For, unlike Visa Europe – a not-for-profit organisation – Visa Inc. is a New York Stock Exchange (NYSE)-listed company driven by profits. With Visa Inc.’s profits currently four to five times higher than those of Visa Europe, the outlook for Visa fees does not bode well for the European merchant community.
Turning back to the IFR, for UK merchants there is also the issue of weighted average to consider. In the case of debit card transactions, each country has the choice of implementing either a flat 0.2% cap or a weighted average 0.2% cap. With this second approach, card schemes can charge interchange fees in excess of 0.2%, provided that the total interchange fees paid across their entire network does not exceed 0.2% over a 12 month period. The UK is the only EU member state that has chosen to apply the weighted average method.
Understandably, this is a controversial decision and will result in many merchants paying above the specified 0.2% cap. Visa’s current debit card fees of 0.2% +1 pence per transaction (capped at 50 pence per transaction for secure debit card transactions), for instance, will remain in place in the UK for at least the next few months. What’s more, it is unclear whether Visa’s current structure is actually compliant with a 0.2% weighted average.
The introduction of the IFR is therefore a double-edged sword. While it has created benefits, merchants must remain savvy to ensure they receive them in their entirety; furthermore, the regulation has inadvertently created a platform for acquirers to bring in new fees, creating the risk that savings will not only be diluted, but perhaps even effectively wiped out entirely.
Merchants face a great deal of uncertainty in the coming months and to help address this, we are holding a number workshops designed to assist merchants in advancing their knowledge of the changes affecting costs and how they can leverage potential savings opportunities. The IFR is creating a complex, challenging card fee landscape and merchants will need to navigate it with skill if they are to keep costs to a minimum and grasp the full extent of the savings possible.
By Callum Godwin, Research Manager at CMS Payments Intelligence (CMSpi).