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Did the regulators get debit card interchange fees wrong?

Interchange fees are fees paid by acquirers to a card issuer each time a payment transaction occurs, and was originally designed to cover the cost of operating the card payment system, as well as compensating them for providing security, guarantee and efficiency of payment and protection against fraud. However, regulators argued that interchange fees lacked transparency for merchants, were too high in many cases and could be exploited for price fixing. With debit card interchange fees in the UK at eight pence per chip and PIN transaction and credit card interchange fees at 0.77% for Visa transactions and 0.80% for MasterCard transactions, most of the focus was on realigning credit card interchange fees, especially MasterCard’s World and World Signia products which were at 1.30%-1.45%.

Due to this, the Interchange Fee Regulation (IFR) was adopted in April 2015 by the European Parliament and the Council of the European Union, and caps were introduced on interchange fees in a bid to make payment processing fees more comprehensible, transparent and standardised across the EU, and standardised across Visa and MasterCard.

Since coming into effect on 9 December 2015, interchange fees were capped at 0.2% of the value of the transaction for debit cards and 0.3% for credit cards. However, the move on debit card interchange fees from a fixed fee per transaction to an ad valorem amount had the potential for significantly raised charges for higher value transactions.

At first Visa, with 95% market share of debit card transactions in the UK, introduced caps on the fees of 50p for chip and pin transaction and £1 for card-not-present (CNP) and non 3D Secure (3DS) transactions. While these caps were significantly higher than the original eight pence per transaction, they limited the fee on higher transactions, and merchants benefited from lower fees on transactions below £40.

However, Visa is now changing its interchange fee structure once again this coming September and removing the caps. Under this new structure, fees will scale up in correlation with transaction value without any caps and the impact on merchants could be significant, as illustrated by the table below:

Merchants likely to be worst affected will be in sectors such as travel and motoring, where consumers are likely to purchase items (a holiday or used car, for example) at £500 and above. In addition, online retailers that see average transaction values increasing significantly around key shopping dates like Black Friday could see their profit margins being eaten into.

A substantial reduction in fees was achieved on credit card transactions when they were lowered from 0.77-0.80% down to 0.3% but debit card transaction interchange fees have increased from eight pence to many pounds for higher value transactions. Considering that 80% of transactions in the UK are actually done on debit cards, merchants overall are paying far more in interchange fees than before. All of this means that issuers get more income than before for higher value transactions, like the weekly supermarket trip and a fill-up of fuel at the petrol station.

What can merchants do to minimise this impact of changes to debit interchange fees?

There is little that merchants can do, and little that acquirers can do either; we are equally on the receiving end in this situation. In fact the only thing we can do is to lobby the regulators to introduce fee caps. At one stage the EU Commission was talking about fee caps of Euro 0.06 cents. This would have had the effect of limiting fees but for some reason it was dropped from the final draft.

With Visa running 95% of UK debit cards, it might be a possibility to lobby them too, but as the scheme that has just removed caps – no doubt under pressure to increase issuer's profitability - it’s unlikely that any lobbying would be successful.

Ultimately, when it comes to debit cards, for higher value transactions the regulators got it wrong, and merchants with a higher average transaction will have to suffer higher fees for now.

About the Author: Andrea Dunlop is CEO of Card Solutions and Acquiring at Paysafe, a provider of digital payments and transaction-based solutions to businesses and consumers worldwide with a focus on emerging payment technologies, including mobile.

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