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Europe Interchange rates reduction: can merchants benefit?

In January 2015, the EU will introduce a cap on card Interchange fees for Visa cross border acquiring on domestic transactions (known as the Cross Border Domestic Interchange Programme, or CBDIP).

A reduction in Interchange fees is almost always a reason for merchants to break out the champagne. However, in this case there are a number of factors to be considered to make an accurate analysis of whether joining the CBDIP will truly benefit a merchant's bottom line.

This post is designed to give merchants an overview of the information they need to consider in order to assess how the changes may benefit their business.

How it works

The CBDIP enables cross border acquirers with regulated entity and operations to offer merchants an Interchange fee of 0.2% for Visa debit cards and 0.3% for Visa credit cards for domestic transactions. On the surface, this sounds like great news as it significantly undercuts many current domestic MSCs (Merchant Service Commissions).

However, there are several steps that need to be taken in order to qualify for the CBDIP. First, merchants must register to the program, and need to process payments with a cross border acquirer that has the following in place:
• A European Cross Border Domestic license.
• An Interchange ++ billing structure.
• The ability to identify transactions with a Single Merchant Identifier.

In addition to having a compliant partner for acquiring, merchants are required to apply either EMV or 3D Secure to transactions as extra security measures.

At this point, it is crucial to be aware of the fact that the conversion impact of implementing these security measures (particularly 3D Secure) in order to join the CBDIP may outweigh the benefits of a lower Interchange for some merchants. Since this is really a case-by-case situation, below we give a brief analysis of how these security measures and other factors may affect CNP and POS transactions against the benefits of using the CBDIP rates.

A mixed effect for Card Not Present (CNP) transactions

There are a number of factors that merchants need to keep in mind for card not present transactions, but two of the most important are 3D Secure and MSCs.

1. 3D Secure: In markets such as the UK, where 3D Secure is widely recognized by shoppers and 3D Secure implementation has an overall positive impact on conversion (please note however that the positive impact is not applicable for every merchant or every card type in the market), the benefits of the lower Interchange are likely to be interesting to merchants. However, in markets such as Germany, where implementing 3D Secure can be a conversion killer, the advantage of low Interchange might not be as apparent. To throw another factor into the mix, the new fees will not apply for commercial cards and for capped rate surcharging. With this in mind, one potential solution is to implement a dynamic approach to 3D Secure – you can learn more about this here: Rethinking 3D Secure: How it can increase conversion rates.

2. Domestic Merchant Service Commissions (MSCs): Merchants with an entity in high credit card Interchange countries such as the UK, Germany, Portugal, and Sweden will benefit most from the CBDIP. However, in parallel to the CBDIP rollout, local acquirers in some markets are now considering or about to implement similar programs. For example, on January 1st 2015, Germany will launch a "Secure Interchange++ Fee" with an Interchange rate of 0.40% for credit cards and debit cards, and the same security requirements as CBDIP. The UK has also recently notified of changes to the consumer debit card rates from March 1st 2015, changing from a fixed rate of £0.10 to something more closely aligned to CBDIP:

a. 0.2% + 1p (50p cap) for secured transactions
b. 0.2% + 11p (£1 cap) for unsecured transactions

A win for Point-of-Sale transactions
While the benefits of the CBDIP for CNP transactions are mixed, for POS transactions they are much clearer. This is because in Europe, POS transactions are already EMV compliant, the process does not impact conversion, and there is no extra investment necessary from a security perspective in order to comply with the requirements for CBDIP. All retailers should be asking questions of their acquirer in how they can support them in moving to the new CBDIP regime.

Which merchants will benefit?
Based on the current situation, the potential benefits of the CBDIP appear to be most interesting for merchants that have two or more of the following:

• An entity in a market with a high MSC and with large volume.
• A significant number of transactions in store.
• A large volume of 3D Secure transactions.

Finally, it should also be mentioned that negotiations between the EU and card schemes in Europe are slowly resulting in a reduction of interchange rates and merchant fees, which (for most) will actually be only effective at the end of 2016. 

Impact of 3D Secure on conversion rates per country
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