Why retailers may miss out on the benefits of interchange fee caps

The long-awaited interchange fee regulation (IFR), which caps merchants’ interchange fees, came into effect at the end of 2015. Yet despite the huge potential benefits on offer, there is the possibility that acquirers may withhold some of the savings, leaving retailers without their dues. Alistair Combes, Director of Knowledge at CMSpi, discusses what retailers can do to make sure they don’t miss out.

The recent introduction of interchange fee caps on card transactions has been welcomed by retailers, with CMSpi estimating that UK merchants could save up to £650 million per annum as a result.

The caps (0.2% of the transaction value on debit cards, 0.3% on credit cards) should be most beneficial to retailers that receive a high proportion of credit card payments; typically high average transaction value (ATV) sectors, such as hotels and travel agents. Indeed, Visa and MasterCard have had to make reductions in excess of 50% to their interchange fees to comply with the 0.3% cap.

Turning to debit card transactions, Visa (which has over 95% of the UK debit card market) altered its rates in March 2015. It is believed that these rates are compliant with the IFR, meaning that merchants with a low ATV (clothing retailers and convenience stores, for instance) should already be reaping the benefit of the charging reductions.
But are all retailers seeing these cost-savings in reality?

Missed savings
There is concern that payment companies may not pass on these savings in their entirety. Indeed, evidence from countries such as the United States and Australia, where interchange regulation is already established, indicates that acquirers may (deliberately or otherwise) absorb the benefits for themselves. And already we can see that a significant proportion of the savings due to UK retailers when Visa reduced its debit card interchange fees in March 2015 have not been passed on in their entirety.

Retailers that are charged by their acquirers through a “blended” pricing structure – often small-and-medium-sized merchants – are at the greatest risk. This type of charging structure combines all the components of a card transaction fee (such as the scheme fee, the processing fee and, of course, the interchange fee) into one charge, and this subsequent lack of transparency makes it difficult to identify whether interchange savings are being applied in full.
While provisions to help improve the clarity of charging structures are set to be implemented in 2016, scope for payments companies to withhold some of the potential savings remains. Indeed, there are already obscure charges and hidden margins imposed by acquirers and this practice could increase as a result of the interchange fee caps.

Clarity is key
To ensure the full extent of the benefits of the IFR are received, retailers need to have a clear understanding of their own costs. Those on a blended pricing structure should be particularly wary.

Retailers should therefore seek advice and consider adopting an alternative, more transparent pricing structure to gain clarity and better position themselves to receive the IFR generated savings in full.

Furthermore, those that did not receive a reduced card acquiring bill when the Visa debit card changes were introduced may be entitled to a rebate from their acquirer. With this uncertainty surrounding fees and savings in mind, we are holding a series of free workshops to help merchants to advance their knowledge about reducing payments costs. The next session is specific to online payments.

Any retailer in doubt about their fees should act now to ensure the true extent of the savings created by the IFR make it to their pockets.

CMSpi is an independent team of consultants and analysts with over 20 years’ experience advising merchants on how to optimise and reduce their payments costs. The consultancy works across all areas of consumer payments with the objective of securing the best end-to-end solution for its clients.

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