BLOG | Early 2015, Visa Europe will introduce their so-called Cross Border Domestic Interchange Programme (CBDIP). This programme will cap interchange fees for domestic transactions processed by European cross-border acquirers. This seems to be excellent news for merchants as it could reduce their Visa card transactions costs considerably. But there is more to it.
Interchange Fees (context)
'Interchange' or 'Interchange Fee' is the term used by the payment card industry to refer to the fees paid by the card acquirer to the card issuer. For every MasterCard or Visa card processed, the merchant acquirer pays a fee to the bank who issued the card to the cardholder.
Interchange fees are most often a percentage of the full transaction amount or a fixed fee (or a combination). Interchange fees differ greatly and are determined by the card type (debit, credit, consumer, corporate), origin of the card (domestic or from another country), the transaction channel (in-store, online, mail order) and the 'technology' used (chip and pin, contactless, 3D-Secure, etc).
The Merchant (Acquirer) pays the Interchange
As the acquirer - responsible for processing and settlement of card transactions to merchants - pays the interchange fee to the issuer, they need to absorb these costs in their charges to merchants. More than logical, from a merchant point of view, it is the merchant acquirer who often gets the blame for the 'high' commission rates charged. Merchants are often still unaware that a fair share of the commission flows back to the card issuer.
To make it more tangible, let's take the interchange fee for a regular ecommerce domestic Visa card transaction. Based upon Visa's current domestic interchange fee schedule for Germany, we can derive that a normal consumer credit card transaction - non-sector specific and conducted securely online - will have an interchange of 1.58%. So for every 100 euro that is processed, 1 euro 58 goes to the issuer. The same transaction in the neighbouring countries The Netherlands and Belgium has an interchange of 0.65%.
If the transaction would be initiated with a Visa corporate card, the interchange would be 1.75% in Germany and 1.45% in the Netherlands and Belgium. The above interchange rate examples already give an impression how interchange fees differ within and between European countries, and the complexity for merchant acquirers to work with.
Please revert to Visa's Fees and Interchange to see all interchange fees per country and for cross-border transactions. (note that most acquirers also offer MasterCard processing with its own unique interchange rates).
Interchange Fees Already Under Heavy Pressure
Important to recognise is that both MasterCard and Visa - heavily pressured by the European Commission - have already lowered their interchange fees considerably, and will need to further reduce fees in the coming years.
Both Visa and MasterCard are pushed towards an average interchange fee of around 0.3% on consumer credit cards (commercial cards are left out of scope). Especially cross-border interchange rates have already been impacted hugely and have dropped considerably to the benefit of acquirers and merchants. (also read our other stories on the interchange topic 'MasterCard Credit Card Rates in Netherlands to drop?' and 'Cross-Border Fees on Visa credit cards will be capped')
In Europe, there are many card or merchant acquirers licensed by MasterCard and Visa to process and settle their card payments (some of the well-known European merchant acquirers are Worldline, European Merchant Services, Adyen, WireCard, Elavon, Worldpay, SIX Payment Services and EVO Payments).
It is MasterCard and Visa's operating model to have local 'brand representatives' processing their card transactions and expanding their acceptance footprint in Europe through merchant acquisition (as it works around the globe). For years, both credit card schemes have known so-called Cross-Border Acquiring licenses - allowing merchant acquirers to expand their operations and acquire merchants across Europe.
Nowadays, it is quite common, especially for larger (online) retailers, to have one card acquirer processing all of their transactions - whether conducted domestically (card and merchant location is in the same country) or internationally (card is issued in another country then the merchant location). It allows merchants to profit from economies of scale, get better rates, and lower operational and reconciliation costs by streamlining settlements.
Specifically these cross-border card acquirers and their merchants could benefit from the announced Cross Border Domestic Interchange Programme by Visa Europe. It could be a huge driver for merchants with high local interchange fees (e.g. Germany) to contract with a merchant acquirer based in another country. As it seems now, the processing location of the acquirer determines whether the transaction is looked upon as an domestic or cross-border transaction. Normally it is determined by the merchant location and the country the card is issued in.
Cross Border Domestic Interchange Programme
So what we have understood from the new program, effective as of January 1st 2015, it enables cross border acquirers to offer merchants from abroad an interchange fee of 0.2% for Visa debit cards and 0.3% for Visa credit cards for their domestic transactions.
Taking into consideration the Visa domestic interchange rates (especially in countries like Germany), merchants able and willing to contract with international acquirers would be able to benefit from lower interchange fees, which translate into lower commission rates and costs. Especially now more and more card acquirers expand their operations and deliver merchant support in more foreign languages, it might seem as an opportunity for card accepting merchants to seek for better credit card rates and conditions. However, there are a couple of things to be aware of.
The program requires merchant registration (small fee to be paid) to get the applicable interchange fees applied and mandates merchants to use either EMV or 3D Secure to transactions as extra security measures. Only licensed Cross-Border Acquirers are allowed to take part in the program. The merchant acquirer should have:
- A European Cross Border Domestic license.
- A so-called Interchange Plus Plus billing structure
- The ability to identify transactions with a Single Merchant Identifier.
Things for merchants to consider
Based upon the foregoing one could say that merchants with large domestic volumes in countries with high interchange fees (e.g. UK, Germany) should really seize the opportunity to lower costs. Cost reduction seems very tempting, however, ecommerce merchants should not neglect a possible negative impact on conversion rates due to the required activation of 3D-secure (as condition of the programme).
In some countries in Europe, the 3D secure adoption and enrolment of online shoppers is not as it should be and could negatively impact conversion. The cost reduction might not outweigh lost sales and brand damage as a result of frustrated online shoppers not able to complete their purchase. For Point-of-Sale merchants, already required to process EMV transactions, there only seems to be something to gain. The same goes for ecommerce merchants already used to process 3D-secure transactions and with large domestic volumes in high interchange countries.
One other thing to understand well is the fact that the new interchange tariffs of 0.2% and 0.3% are only applicable to consumer card transactions. For merchants currently accepting business and corporate cards - which might be the larger share of their card volume - will only see little benefit when transferring their volumes to cross-border acquirers. That is regardless whether you are an online merchant or accepting card payments in-store.
On top of that, it is good to know that two of the largest ecommerce markets in Europe, the UK and Germany - and known for their high interchange rates - will probably introduce lower domestic rates very soon. In Germany, also effective as of January 1st 2015, there will be set new domestic interchange rate aiming towards the 0.30-0.40% for credit cards and debit cards (note: with the same security requirements as the new Visa programme). In the UK, the domestic interchange fee will be lowered as of March 2015 and assumed to become more aligned with the new rates of Visa's domestic interchange programme. Furthermore, and already pointed out, the interchange fees domestically will continue to lower to the average 0.3% in the coming years. By the end of 2016 both MasterCard and Visa should have accomplished this weighted interchange percentage for all (consumer) card transitions.
Opportunity for Merchants and Card Acquirers
Resulting from the above, merchants might be triggered to start investigating their current situation. They could engage with their current acquirer or seek for other acquiring solutions in Europe in order for them to find the best online credit card rates ánd acceptance conditions.
For cross-border card acquirers there is a huge opportunity arising. On the one hand to build stronger relationships with their existing merchant base and help them to benefit from the upcoming changes. On the other hand to acquire new merchants from other European countries who have now an important driver to reconsider their current card acquirer. One thing is for sure. Competition within the European acquiring landscape is to heat up.
Article by Erik van den Heuvel, About-Payments, November 11th, 2014.