Following EU intervention, the transaction fees earned by card issuers have changed dramatically over the last year. The fees are better known collectively as “Interchange” and form the major part of acquirer costs when they are pricing for your business. The undoubted political aim of the intervention is to reduce retailer’s transaction costs and within the UK that is by as much as £700m a year!

There is a secondary aim of making competition easier by standardising the presentation of pricing, but that is for the future.

Debit Cards

The first major step affected personal Visa Debit cards in March ’15 and saw the interchange cost alter from 8p per transaction to the sum of 0.2% of value plus 1p. For those clients whose average transactions for Visa Debit cards were likely to remain below £35, we were then able to negotiate tariff improvements reflecting their acquirers improved cost base.
MasterCard debit cards changed to 0.2% from 8p per transaction on 9th December. Typically these form a very small part of UK transactions.

Credit Cards

MasterCard interchange fell in stages from June ’15 onwards, with the first stage seeing the removal of differential higher pricing for premium cards. The most dramatic step was reserved for December ’15 when interchange for both Visa and MasterCard personal credit cards fell to 0.3% by value. Previously such costs ranged from 0.77% to 1.5% depending on the type of card and transaction channel. Credit card charges normally form the greatest part of a retailer’s card acceptance costs – notwithstanding that debit cards are more widely used. So the December changes have a dramatic impact in reducing your supplier’s costs.

Market Response

So far there is no typical response even within a single acquirer, let alone across the market as a whole. In the cases we are dealing with, there are perhaps four scenarios:

1. The acquirer has made an offer to change tariffs and either implemented this or given notice of implementation within normally 3 months. The offered tariffs will maybe show a good reduction in costs (except if there are high value Visa Debit transactions) and the retailer may be tempted to accept. The two questions I would ask myself here are:- “Is the supplier passing on to my business the major elements of the overhead savings?” and “Is the offer competitive when judged against the wider market place?”

2. The acquirer has done nothing and their profit has increased as a result. Firstly, this may be understandable – in the very short term all are working their way through accounts to understand the impact on their own position. However where I have judged that it is quite clearly advantageous to act now, we have done so to great effect. The major questions I ask myself in this scenario are “Are the interchange alterations to the client’s benefit?”, “What is the extent of that benefit on a card type-by-card type basis?” and then “Is any subsequent offer both sufficient and competitive?”

3. The acquirer has done nothing and is losing money on your business. These are rare situations but typically activity is very heavily weighted towards debit cards, and transactions average comfortably in excess of the £35-£40 range. A recent example was a car retailer – with no fuel or repairs/servicing elements – where deposits ranged from £1k to £2k. Our advice was to sit tight on current rates for as long as possible and take as long as possible over any negotiations opened by the acquirer. (We were also able to help planning to budget for inevitable increases in due course and also mitigate impact through an awareness of interchange “caps” on debit card costs).

4. A business is on a cost plus tariff and so the benefits naturally flow through. The first question here is to be sure you are on a cost plus tariff. At least one acquirer offers by default a complex arrangement that includes separately detailed Transaction Fees, Interchange Differential Fees and Scheme Fees; it is a very open way of charging but it is not “cost plus”. The second – and more pertinent question – though is “does the acquirer margin seem reasonable and competitive”. I am a big fan of cost plus arrangements generally, but the “plus” element has to be valid.

Way Forward

Unquestionably the overall interchange costs of card activity in the UK are estimated to fall by £700m a year. However only the card issuers will see that impact in full as a result of the EU intervention. Only market forces will see the benefit flow though to where it is intended to – the retailer and by extension the consumer. To my eyes, the UK acquirers have an opportunity to improve their profitability and we are certainly seeing them take it.

Within ERA’s Payments Team our pivotal mission is to see as much of the £700m as possible finding its way to the bottom line of our clients.