Interchange & Pricing a Better Deal for Merchants?

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1 Interchange & Pricing a Better Deal for Merchants? Merchant Acquiring Conference, London 23 rd November 2012 Luke Purser, Principal Consultant PSE Consulting

2 Merchant Pricing Continual Change EU Commission mandates all acquirers must unbundle MSC fees MasterCard loses appeal against card transaction charges Quasi cash reverse interchange removed by Card Schemes Acquirers load MSC to recover higher interchange product costs Refund qualification under more scrutiny MasterCard to raise debit card interchange rates Headline MSC rates disguise high cost of additional services Interchange Plus Pricing accelerates for large merchants Observation: Merchant pricing will continue to be volatile as acquirers drive to increase revenue as interchange rates decline and costs increase 2

3 How has Merchant Pricing evolved? Historically, acquirers offered merchants blended ad valorem rates for credit cards and a flat fee per transaction for debit cards Following an agreement with the EU Commission, EU acquirers now have to unbundled fees per scheme and product and negotiate each rate with the merchants. In the UK, acquirers have adapted their pricing as follows: SMEs ISOs/PSPs offer a blended price for their acquiring service in conjunction with acquirers e.g. Buy rate Pseudo Interchange Plus Increasingly common where a set rate is negotiated with merchants and additional charges are made for exceptional events e.g. late submission, unsecured ecommerce transactions, Premium Products Interchange Plus Merchants Many large merchants are now choosing or being directed to an Interchange Plus arrangements. Acquirers who can demonstrated direct saving as Additional Services Increasingly more event driven services are being used by acquirers to generate new revenue rather than purely from transactions and attempt to make the relationship stickier 3

4 Acquirer Pricing: A Change in Approach? Pricing Complexities ge Fees Interchan Card Schemes Visa & MasterCard Sectors Airline, Petrol, Supermarkets Acceptance Type POS, ecom Product Type Consumer, Corporate, Premium Txn Location Domestic, Intra & Inter Txn Type EMV, CNP, ecom, Merchant Service Charge Acquirer Fe ees Scheme Fees Wallets Recurring Txns Acquiring Margin Chargeback Processing Costs Operational Costs 4

5 New Pricing Events Premium Products A number of new Premium consumer card products with higher interchange have been rolled out in the UK Acquirers are passing on the increased cost to merchants in the form of extra fees Event Charging Merchants, not accepting cards in an optimal way, are being penalised with additional fees e.g. unsecured ecommerce fees Card Schemes are expected to create new scheme fees payable by acquirers e.g. ewallets to supplement the drop in interchange and redistribute the revenue Interchange Downgrades Acquirers are shifting the responsibility and higher costs to merchants who miss key interchange criteria e.g. timeliness or fail to implement common security protocols 5

6 MSC Challenges for Merchants Varied Acceptance Channels Third Party Providers Lack Of Knowledge Merchants have limited knowledge of how interchange qualification works. MSC Challenges Multiple Submission Reconciliation Issues Complexities Process Weaknesses There are 100s of different interchange rates across both schemes. Transaction submission processes vary across acceptance channels. Reconciliation procedures are often complex with multiple acquirers, and acceptance channels. Many large merchants rely on third parties to submit transactions to their acquirers. With the growth of ecommerce payments, merchants have developed alternative acceptance channels quite different from F2F solutions. 6

7 Interchange Plus Pricing - Advantages & Disadvantages Advantages Disadvantages To Merchants Full transparency on up to 60% to Relies on accuracy of acquiring coding 80% of costs Separate lower acquiring fee Often information overload detailed statement to analyse Immediate pass through of lower interchange rates Potential to optimise submission and reduce costs Lack of skilled staff with interchange knowledge Often little support from acquirers Meets scheme unbundled mandate Lower rates and challenging To Acquirers Pass through costs enables Merchant pushback if rates misapplied consistent margin/no interchange increase erosion Provided costs optimised - a competitive differentiator Lack of processes to ensure indirect costs minimised 7

8 Interchange Plus Merchant UK Example Interchange plus pricing i can be beneficial i however inefficient i merchant processes can drive up the overall MSC rates that a merchant pays Total Monthly Fees Overall MSC Rates Source: PSE Analysis 2012: UK Consumer Products Only, F2F transactions Only When additional fees are passed to the merchant, The additional fees increases the average credit card this increases their monthly cost from 22.5K to MSC rate from 1.22% to 1.33% 24.7K Additional fees cover late submission, premium products but exclude all other service charges Average debit card rates rise from 0.09 to 0.10 per transaction. Whilst a small rise, this merchants submits over 170,000 transactions per month. 8

9 Typical Problem Areas Interchange Plus Merchants Causes Processing problems by merchants or 3 rd parties can cause transactions to arrive late Late submission of data to acquirers may cause transactions not to qualify at optimal rates UK submission timeframes are tighter than EU 3 days compared with 4 Causes Preferential rates are available for ecommerce transactions qualifying for VbV and Secure Code rates CVV2 rates can also be achieved for Visa EU ecommerce transactions despite not using 3D secure Causes Incorrect data can cause transactions to downgrade to standard rates. If this is a merchant or 3 rd party error, the costs are borne by the merchant 9

10 A Better Deal for Merchants? Inefficient Payment Processes Changing Interchange Structure Complex Pricing Increasing Merchant Burden 10

11 Actions Merchants can take to Optimise Costs 1 Collaborate with Acquirer Work closely with acquirer and build plan for interchange optimisation 2 Build basics understanding of interchange benchmarks Benchmarking what you should pay versus what you are paying 3 Operational Processes Work internally or with 3 rd parties to improve accuracy of data and correct population of fields and meet acquirer submission timeframes 4 MIS Implement basic MIS/exception reporting to highlight where not qualifying for lowest rates 11

12 Luke Purser +44 (0)