Understanding interchange and reaping the benefits

Merchants across Europe stand to receive €4.2bn of annual savings when interchange fee regulation (IFR) caps are introduced on 9th December 2015. This equates to an average saving of nearly 50% on current fees and is because European interchange fees are being capped at 0.2% of the transaction value for debit cards and 0.3% for credit cards.

Yet due to a lack of clarity around card fees, many merchants are likely to see little or no benefit from this welcome regulation. Here the author discusses 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 various factors such as the country and sector they are in and the charging structure they use.

Who stands to benefit the most?:

In the UK, the biggest beneficiaries from December 9 will be merchants with a high proportion of credit card transactions. These include sectors with typically high average transaction values (ATVs), such as hotels and travel agents. This is because domestic Visa and MasterCard consumer credit card transactions will see interchange fall, from an average of around 0.70% to 0.30%.

By contrast in France the biggest beneficiaries will be merchants with a high proportion of debit card transactions. These include low average transaction value sectors, such as quick service restaurants and convenience stores. This is because interchange for immediate and deferred debit card transactions will fall from 0.30% to 0.23%.

Elsewhere, German merchants are charged an average of 0.71% interchange on both debit and credit cards – one of the highest in Europe – and the reduction to 0.2%-0.3% will bring an estimated €450m of annual savings. This significant reduction is a big win for German merchants.

Who stands to benefit the least?

Back to the UK. For merchants who see a high proportion of debit card transactions, such as quick service restaurants and convenience stores, there will actually be very few benefits when the IFR kicks in. This is because Visa, which has more than 95% of the UK debit card market, is not altering its UK domestic rates after they were changed in March 2015.

In France, merchants who see a high proportion of credit card transactions – such as hotels and travel agents – will also enjoy very few benefits. This is because interchange for credit card transactions will not change from its current rate of 0.30%, which has been in operation since October 2011 for Cartes Bancaires (CB) cards and November 2013 for Visa/MasterCard cards.

Additionally, many countries such as Denmark, Belgium and Norway are dominated by local debit card schemes with zero or low interchange fees, so will also not see any significant fee changes. Finally, Spain, Hungary and Poland, which have already implemented the IFR in full, should already be benefitting from the changes.

It should be noted that a number of card types are exempt from regulation and in these instances the charges should not change: these include Visa & MasterCard commercial cards, American Express and Diners Club.

Charging Structures
Most small and medium-sized merchants in Europe are charged “blended” pricing by their acquirers. This means that interchange savings are not necessarily passed on to merchants, and evidence from other jurisdictions where interchange has been regulated – such as Australia and the US – suggests that acquirers may (deliberately or otherwise) absorb the benefits for themselves.

Many larger merchants are now charged using “interchange plus” or “interchange plus plus” pricing, which means that the benefits of regulation are far more likely to be passed on in full.

What else do merchants need to consider?

In addition to the IFR caps on 9th December, further new rules benefiting merchants will be introduced six months later, on 9th June 2016. These include:

Unblending
Acquirers will have to offer merchants “interchange plus” or “interchange plus plus” pricing, meaning that, in theory, acquirers should no longer be able to withhold interchange savings from merchants. However, many merchants who are attracted to the simplicity and ease of reconciliation of blended pricing may choose not to implement the new pricing structures and therefore could potentially miss out on the interchange savings.

Co-badging
The great majority of domestic bankcards in some countries, most notably France, are co-badged with a domestic card scheme and either Visa or MasterCard. Currently, the majority of these are automatically routed via the domestic card scheme, but from 9th June 2016, consumers will be afforded the ultimate decision over which network the transaction is sent through. This could mean more traffic via Visa and MasterCard. 

Honour all cards
Additionally from 9th June 2016, merchants will no longer be obliged to “honour all cards” and will have more control over which card types they do or do not accept, meaning they are free to reject exempt card products.

What can merchants do if they’re unsure?

Merchants on “blended”* pricing need to make sure that savings are passed on to them by their acquirer. As stated above, this may not happen automatically until June 2016 so merchants need to be proactive to avoid exploitation. The best way to achieve this is for them to contact their acquirer and ask for either amended “blended” pricing or to be transferred to “interchange plus” or “interchange plus plus” pricing.

Additionally, many merchants have yet to actually receive any benefit in the aforementioned countries that have already seen regulatory intervention, so it is also worth checking to see if they received a reduced card acquiring bill on these dates. If not, they may be entitled to a rebate from their acquirer(s).

Certainly, the interchange landscape can seem complex. Yet if the changes being introduced are understood and managed effectively, merchants stand to benefit from a multitude of cost savings.

*A blended pricing structure is where all of the components of the service charge are bundled into one fee.

 

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