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Gareth Ellis

Gareth Ellis

Gareth Ellis - ACI Worldwide

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Are you losing sleep over interchange fee changes?

29 July 2014  |  5616 views  |  3

If you’re a European merchant acquirer, then I should think you are. 

In case you've not been following the conversations around the new regulations, here’s what we know already:

  • The EU Commission continues its attack on reducing interchange rates and changing the cards business model across Europe
  • There are plans to introduce new card regulations that will reduce interchange rates both for domestic and cross border transactions, and change other aspects of cards acceptance such as the removal of 'honour all cards'

As with all governmental regulations, whilst we know broadly what will happen, it is difficult to guess exactly when this will happen. In the meantime, Visa Europe has made a concession to the EU Commission, which changes the way cross border interchange rates will be structured and capped in the future. MasterCard wants to get involved, but have a little legal process to deal with first.

Visa's proposals will begin in earnest on 1st January 2015. At this point, cross-border acquirers with operations outside a country, as long as they meet a number of criteria, will be able to offer substantially lower rates to domestic merchants than the current merchant service charges they are paying. This will be fuelled by Interchange rates of 0.3% (for credit) as opposed to 0.77% (UK), 0.9% (Germany) and 1.3% (Poland). Debit will be charged at 0.2% as opposed to £0.08 (UK). Cue market disruption, a price war, and a period of land grab as cross-border acquirers try to steal a bigger share of the pie from domestic-only acquirers.

It should be an interesting period lasting up to a couple of years, especially when it comes to seeing which acquirers will make the most of this period of change and who may suddenly leave the business to focus on 'other operations'.

Getting the appropriate licenses is obviously going to be difficult and time-consuming. Also, knowing how many of the major European acquirers use old legacy systems, I do wonder which of them have the technology to claim the lower interchange rates. I can imagine that the following conversation is taking place between many acquirer CEOs and CTOs in boardrooms throughout Europe: 'OK, so we don't support Interchange ++, single merchant identifiers or complex cross border merchant hierarchies, but surely we support least cost routing?'

Added to all this, we have the further unknowns such as MasterCard's eventual arrival, EU government timescales and a large number of new market entrants. I can only imagine how little sleep merchant acquirers are getting at the moment.  

TagsPaymentsRetail banking

Comments: (4)

A Finextra member
A Finextra member | 29 July, 2014, 18:16

It's more than likely the Issuers with tight margins (such as Prepaid Issuers) who are going to be losing sleep if there is continued pressure to reduce interchange fees - and result in reducing their interchange fee income.  This is also likely to be a catalyst to the elimination of “free banking” currently enjoyed in the UK – moving towards an Issuer transaction-fee based approach similar to that seen in other countries such as the United States.


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A Finextra member
A Finextra member | 30 July, 2014, 06:28 Does anyone really think Visa & Mastercard will just reduce the interchange fees. Unlikely, scheme fees and/or some new dreamed up fees will no doubt increase to at least make up the loss and status quo will be resumed. But of course the EU will still claim victory, Visa and Mastercard will claim they complied and the press might run articles about how shoppers should be paying less. It will be a PR victory for the EU only. But is keeping things the same so bad? If we really want competition in payments then why would any newcomers challenge the two scheme's dominant position for such low margins. They would find it harder to get retailer adoption if their costs were higher for the new method. So if the EU does achieve a straight reduction, will it have actually reduced or eliminate any competition and perversely strengthen Visa and Mastercard's stranglehold on the retail payments business?
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A Finextra member
A Finextra member | 30 July, 2014, 10:58

Not sure I agree with you, Gareth.

First, for most retailers in Europe, merchant service charges (MSC) are set as "blended interchange + acquirer margin", so any reduction in interchange is not going to put pressure on the acquier margin - it's just going to reduce the resulting MSC for merchants.

Second, I don't believe that this change will suddenly enable cross-border acquirers to offer significantly lower MSCs to merchants in certain markets - lower than those that they are currently offering. Actually, due to the fact that the interchange is getting capped at a lower lever and the MSC is getting smaller, the margin for competition is getting squeezed even further. And by the way, most large acquirers in Europe have been optimising fees for clients by routing to other countries for a number of years - it's not as bad as you picture it :)

Finally, I think it's the issuers who should be losing sleep as they are going to wave goodbye to a significant proportion of their interchange revenue - and I agree with another comment that banks are likely to try to offset this loss by making consumers pay for bank accounts.

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Gareth Ellis
Gareth Ellis - ACI Worldwide - Watford | 04 August, 2014, 15:08

Thank you for your views, I will respond to each of these comments separately.

To the first comment, you are correct that the Issuer revenue impact will become more challenging and Issuers will need to find alternative ways in generating income and this could focus on current services that are provided free of charge.

To the second comment, the expectation is that interchange rates will be reduced and legally binding commitments from Visa Europe point to that fact. I expect the EU Commission will closely monitor the level fees as part of the Trustees role in ensuring that the income received covering all types of scheme revenue does not exceed the threshold set. There is a danger that merchant pricing becomes commoditised and therefore the business case from alternative providers does become more challenging when compared with card payments.

Finally, to Andrei Charniauski, the proposed pricing method that acquirers will need to offer will be interchange + Scheme Fee + Acquirer margin. The acquirer margin will be split out going forward as it typically includes schemes fees and other related costs. Acquirer margins will now be the area that will be in focus as all parties pay the same interchange rates, scheme fees (is a pass through cost) and the margin will be negotiated. As the acquirer margin is negotiated this will be in the spotlight and be compared with other offers.

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Gareth Ellis is a Business Solutions Manager at ACI Worldwide. Within this role, Gareth manages a team of consultants on all areas of back office. His experience encompasses both front and back end s...

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