Many merchants will see little or no benefit from interchange regulation

From 9 December 2015 onwards, UK merchants should achieve a significant reduction in payment costs following the introduction of interchange fee regulation. There are fears that payments companies will not pass on these savings to merchants in their entirety and opaque charging structures make this extremely difficult to identify.

What’s happening?

Merchants across the UK stand to receive GBP 650 million of annual savings when interchange fee regulation (IFR) caps are introduced on 9th December 2015, an average saving of 25% on current credit and debit card transaction fees. However, many merchants will see little or no benefit from the regulation. Here we discuss what merchants need to know and what they can do to ensure they do not miss out.

How does this affect merchants?

Different merchants will be affected in different ways by the regulation, depending on a number of factors such as the transaction profile and charging structure they use.

Who stands to benefit the most?

The biggest beneficiaries on 9th December will be merchants with a high proportion of credit card transactions. These include high average transaction value (ATV) sectors such as hotels and travel agents. This is because fees from Visa and MasterCard credit card transactions are where merchants will see the biggest reductions.

Interchange for Visa Credit is falling from 0.77% of the transaction value to 0.30%, while interchange for MasterCard Credit fell from 0.80% to 0.70% in September 2015 and will fall to 0.30% on 9 December. Many credit card transactions have already seen an interchange reduction.

On 1 April 2015, MasterCard reduced the interchange on its premium credit cards – MasterCard World, World Signia and Rewards – and lowered non-secure consumer credit cards from between 0.90% and 1.85% to 0.80%. This rate was further lowered to 0.70% on 9 September 2015.

Who stands to benefit the least and are debit card transactions included too?

For merchants that see a high proportion of debit card transactions, such as QSRs (quick service restaurants) and convenience stores, there will actually be very few benefits on 9 December. This is because Visa, which has more than 95% of the UK debit card market, is not changing its UK domestic rates.

Visa changed its UK domestic debit card interchange rates on 1 March 2015 and, based on current communications issued to the market, these may already be compliant with the IFR - therefore, will not change again until at least April 2016. For a secure consumer domestic face-to-face Visa Debit card transaction, interchange transitioned from 8 pence per transaction before March, to 0.2% plus 1p of the transaction value, capped at 50p.

As a result of the transition in March, 2015, merchants with a low ATV - such as the QSR and convenience store sectors mentioned above - will already have received a reduction to their underlying cost base, and subsequently, should be entitled to receive savings to their merchant service charge from their acquirers. It should be noted that a number of card types are exempt from the 9th December regulation, so charges paid for accepting Visa and MasterCard commercial cards, American Express and Diners Club cards will not change.

Charging structure

Although special provisions are to be implemented to try to make charging structures more transparent, there remains scope for payments companies to not pass on the full benefit to merchants. Obscure charges and hidden margins remain and may be expanded. Many of the savings due to retailers from Visa Debit changes earlier this year were not passed on in full, and CMSpi expect a similar result with this latest round of legislation.

Other considerations

From 9th June 2016, merchants will no longer have to “honour all cards”. so will have more control over which card types they do or do not accept.

Brendan Doyle, CEO, states that: Overall, I am disappointed with the way that the UK government has handled the implementation of interchange regulation. I feel that there was a real opportunity to introduce a definitive solution to the issue of excessive interchange fees. However, with the current situation, the savings that were initially forecast have been chipped away.

About Brendan Doyle

Brendan is the CEO and founder of CMS Payments Intelligence, an independent payments consultancy. Brendan has also led numerous campaigns on behalf of the European merchant community including: calling for a reduction of the barriers to entry into the payments systems industry, the appointment of a UK Payments Regulator and petitioning for a reduction in interchange fees.

About CMSPI

CMSpi is an independent team of consultants and analysts with over 20 years’ experience advising merchants on how to optimise and reduce their payment acceptance costs. It works across all areas of consumer payments with the objective of securing the best end-to-end solution for its clients. CMSpi has worked with hundreds of major retailers during the changes to interchange to analyse costs and benchmark margins to ensure they are getting a fair deal.