Stephen Whitlam from our Payments Team explains a key market change and how businesses can manage its potential impact.

Most businesses are aware that during 2015 there were dramatic changes in Merchant Acquirer interchange costs for personal card transactions. The cost for credit cards fell significantly from between 0.8% to 1.5% by value to a common level of 0.3%.

Visa debit cards, though, saw a move from circa 8p per transaction to 0.2% by value plus 1p. The impact of this on high-value transactions – those greater than around £240 or so – was mitigated by a cap of 50p (£1 for non-secure transactions).

Whilst every acquirer adapted to the changes differently, it is fair to say that there was no particular disruption. This was because at a very broad level, the cost decreases the acquirers enjoyed on their credit cards activity offset any increases in debit card costs. All were addressing the issue at varying paces, or had plans to do so by the end of 2017.

September 2016: the cat amongst the pigeons!

Visa dropped the debit card interchange cap of 50p (as well as the 1p per transaction addition) which suddenly increased the cost burden where there are high value debit card transactions. This has fallen at a time when the acquirers were beginning to see the benefits of investment in their own IT, which helps more readily identify the profitability of accounts in much more dynamic ways than was previously available.

So we are now seeing clients receive notifications of significant changes in their card costs. Particularly those on blended rather than cost-plus charging arrangements. This is not just those who have high value transactions by the way; the IT investments have enabled a wider concentration of effort.

Are increases in costs justified?

The simple answer is that without an understanding of a business’ transaction mix, it is difficult to know. Everyone would accept and understand that a supplier has to maintain an adequate margin… but is the proposed margin fair and competitive?

ERA’s Payments Team recommends a process of quantifying volumes and average transaction scale for each card type commonly used, and then calculating both the pre-September 2016 and proposed margins. It is then a judgment call as to whether the change between the two justifies challenge and – importantly – whether the ongoing margin is fair and competitive.

The Payments Team is happy to discuss helping any client through this activity. Either in whole or with specific elements. We have a detailed knowledge of current acquirer procedures and strategies.

Article by: Steve Whitlam & Paul Davidson