Interchange regulation stands to provide the European merchant community with a windfall of an estimated EUR 4.2 billion per annum, although this amount could be minimal for online merchants.
All merchants need to be vigilant to ensure that savings are received in full, as there are still plenty of methods that the payments industry can employ to mitigate the effects of Interchange Fee Regulation (IFR). Here, we assess these methods:
1. Card schemes
The global card giants of Visa and MasterCard are likely to view the IFR as an excellent opportunity to increase their own income.
This is consistent with the consequences of payments regulation in the US, where the Durbin Amendment saw debit card interchange fees capped from October 2011. In the four years since Durbin was introduced, US merchants have seen a plethora of new fees and charges introduced by Visa and MasterCard which have reduced the benefits of the regulation by more than 30%.
There is already evidence of this taking place in Europe; we have already seen four new fees/charging alterations from MasterCard, which will erode the benefits of the IFR by more than 5% for the online sector. The most significant of these is a new EUR 15 fee per chargeback, which will be very expensive for online merchants. Although Visa are yet to reveal any such fees, we are concerned that Visa Europe’s anticipated takeover by Visa Inc. will realign its objectives to that of a profit-seeking entity, one that would be more likely to charge higher fees to merchants.
It should be noted that circumvention clauses in both Europe and the US have not adequately covered scheme fees, enabling sufficient flexibility for these fees to take place.
2. Merchant acquirers
Evidence from the post-Durbin environment in the US suggests that the IFR will provide merchant acquirers with the opportunity to increase their own margins.
The main method acquirers can use is to withhold the passing-through of savings to merchants, with smaller merchants on blended charging structures particularly vulnerable. Although there is an “Unbundling” clause included in the IFR which should in theory prevent acquirers from doing this, we still believe that there will be opportunities for acquirers to increase their margins.
Merchants on blended structures need to be proactive to ensure that their blended prices are changed to reflect the reduction in underlying costs for their acquirer. Merchants on interchange + or ++ charging structures should automatically receive pass-through, although charging errors are common so invoices should still be reviewed thoroughly.
3. Card issuers
Ultimately, the real losers from interchange regulation are card issuers as it is they who bear the impact of reduced income. There are three main ways issuers may try to regain lost income:
i. Issuance patterns
The IFR has exempted many card types, most notably three party card schemes (such as Amex) and commercial cards. Issuers can, therefore, reduce the impact of the IFR by increasing issuance of exempt card types. Indeed, we have already seen evidence of this happening; in May 2014, Barclaycard decided to issue American Express rather than Visa cards to 700,000 of its customers. This will have a particularly large impact for the online sector which sees a disproportionately high number of credit card transactions.
ii. Banking fees
For acquirers that are owned by issuing banks, interchange fees are just one source of income that they receive from a merchant relationship. Other areas include acquiring and banking fees, and these are all areas potentially subject to fee increases.
iii. Consumer fees
Issuing banks may attempt to replace lost interchange income with cardholder fees. We suspect that their ability to do this will depend on the competitiveness of retail banking markets and hope that this is an area that domestic regulatory authorities look at.
Merchants need to be willing to use the relaxation of the “Honour All Cards” rule included in the IFR to reject certain IFR-exempt card types. A constant review of other bank-related fees is also needed to ensure that these do not drift upwards following the IFR.
About Alistair Combes
Alistair is a payments advisor with over 10 years’ experience of retail payment acceptance operations and cost management. He specialises in global non-cash payments with a focus on breaking down & optimising end-to-end supply chain costs for the retail, hospitality and fuels sectors across major international markets. Alistair is a regular guest speaker at conferences and seminars covering innovations in the payments industry, interchange and costs of non-cash transactions.
About CMS Payments Intelligence
CMSpi acts as a merchant champion in the payments industry. We are actively engaged with merchants of all sizes to help minimize their cost of payment acceptance.
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