Have you been notified of the increase in interchange fees that are due to come into effect October 2021? With the departure of the UK from the EU, VISA and Mastercard interchange fees are expected to increase by 5x the current rate.
We explore what impacts this will have on merchants who already take payments in the EU and what can those who are planning to expand do to protect their business from increased costs. Read on to understand how to safeguard your business in this transition period.
The increase will impact online transactions where the customer's card was issued outside of either the UK or Europe and that customer is attempting to purchase goods or services from the other region (UK or Europe). With an increase of Interchange Fees on Credit Cards rising to 1.5% and 1.15% on Debit Cards, most merchants are embarking on a process to ensure their business is protected either from negotiating lower rates with their Payment Provider or passing these costs on to consumers.
What is an Interchange fee? These are fixed, non-negotiable fees set by card networks (Largest of which: VISA and Mastercard). This is paid by the merchant to card issuers (Financial entities which issues the card, e.g. HSBC, Barclays & Santander) within each transaction that is charged by the Payment Service Provider (Acquirer). Essentially, you are paying the issuer for the ability to accept payments electronically.
It seems that opportunities are being limited for many merchants who are looking to begin their Digital transformation and start selling online to their customers based in the EU. Merchants are trying to wrap their heads around the impact the surge in fees will bring. In a time where a shift to online shopping can be considered an inevitability, with the closure of face to face transactions, merchants are having to adapt their expansion plans.
To provide historical context on Interchange fees, in 2015, there was a cap placed on Interchange Fees applicable to all debit and credit cards (i.e. 0.2% on Consumer Debit and 0.3% on Consumer Credit), carried out by the IFR (Interchange Fee Regulation). This cap, however, only applies on transactions where the issuer, acquirer, and merchant are all located in the EU.
With the UK’s exit from the EU, interchange fee caps no longer fall under the jurisdiction of the IFR and with no pricing regulator, VISA and Mastercard have exploited this opportunity by increasing the interchange fees by 5x.
Such an increase in interchange fees will leave many retail shoppers with fewer options in the field they are looking for. EU merchants who are being impacted by the increase in fees will have to compensate by either increasing the prices of their goods or, to merely absorb the particular fees which is not ideal given the impacts caused by the Covid-19 Pandemic & additional bureaucracy in shipping goods cross-border between the UK & EU.
With cross border transactions being completed regularly between the UK and EU countries, not only will SMB’s and SME’s be heavily affected, but so will multinational groups, such as Amazon, who route their UK orders through its Luxembourg subsidiary. The impact from these price increases by VISA and Mastercard are likely to be substantial. Whilst most large businesses have the ability to re-route transactions through a domestic entity in the UK (avoiding the increase in fees), smaller merchants relying on a single domestic entity in either the UK or Europe will be left to decide how they operate in the other region.
There are several fee’s that the merchant can control in their overall pricing that are owed directly to either the Acquirer or Gateway. That is why we are actively encouraging new merchants to DNA Payments to review these costs before any pricing increases this year.
Have you ever looked at your Payment Provider Processing Statement for your electronic transactions and wondered what the confusing array of fees are for? We have broken down the costs that form your overall pricing below:
Interchange Fee: Owed to the Issuing bank (i.e. Barclays, Santander, Natwest)
Card Scheme Fee: Owed to the Card Network (Visa/Mastercard)
Acquiring fee: Owed to the Acquirer (i.e. DNA Payments, Worldpay, Global Payments)
PCI fee: Owed to the Acquirer for certifying the merchants PCI Compliance
Card Not Present Fee: Owed to the Acquirer for the additional risk involved in processing an eCommerce transaction
Cross-border Fee: Owed to the Acquirer for additional risks involved in processing cross border transactions.
Gateway Fee: Owed to the Payment Service Provider for authorising the transaction & sending the transaction on to an Acquirer.
In order to improve operational efficiencies for merchants, they may look to manage fewer relationships with their various sales channels and switch to a payment provider who will be able to combine these channels to create a singular omnichannel.
As the lockdown is slowly easing up, merchants are taking this opportunity to work with an acquirer that can advise them on the best way to navigate the current landscape. The best Payment Providers pride themselves on reducing complexity with fewer reports to reconcile, allowing merchants to focus on improving the buying experience for their customers while shopping online. Simultaneously, this will reduce the workload to the Finance Department who are already swamped with Brexit related impacts.
The good news though is that our team at DNA Payments will be able to step in and reduce the other costs experienced. As the interchange fees are non negotiable, the solution for merchants will now be to eradicate costs on processing charges and other external fees. The team at DNA Payments will be happy to offer a cost comparison of the rates that your payment provider is currently charging you to ensure your business is protected this year.
We want to let you know about the planned maintenance and update of DNA Payments transactional system software.
We specifically choose a time of the day with the smallest amount of transaction activity for our software updates.