Challenges of interchange changes

When a retailer’s bank issues payment to a retailer it deducts a Merchant Service Charge (M.S.C.) which includes an interchange fee, the charge levied to cover technology, security and operational costs of a transaction. It’s normally a small percentage of the overall transaction value. The charge is agreed between the retailer and their bank, known as the acquiring bank.

The U.K Card Association has welcomed the government’s resolve to pass on M.S.C. savings to merchants under newly enforced regulations.

In July 2013 the European Commission published a proposal for imposing restrictions on interchange fees following extensive research across Europe by commission members and national regulators. Their aim was to universally cap the interchange fee value to 0.2% of the total transaction value for a debit card payment and 0.3% if the transaction was made via a credit card. The Interchange Free Regulation was agreed on 29th April 2015 and was formalised on 8th June 2015.

The cap on interchange fees was administered in the U.K., the largest card market in Europe, from the 9th December 2015 after Her Majesty’s Treasury laid out its guidance in October 2015.

Some cards were deemed exempt from the interchange fee cap, these were the ones issued and acquired by third party schemes and commercial cards, i.e. cards used solely for business purposes.

The U.K. Treasury acknowledged the I.F.R. position that 0.3% interchange fees were to be charged on domestic credit card transactions. Debit card transactions were to be charged at 0.2% or less of the annual total value of domestic debit card transactions and card scheme managers have the flexibility with these domestic transactions to employ a weighted average rate. This was permitted for a set period of five years.

The interchange fee changes passed savings to merchants which averaged at 25% reductions but not at the expected time. The reduction sounds excellent and for some businesses with high average transaction values considerably less is being paid in fees, however, for the merchants of smaller outlets like convenience stores and eateries, with low average transaction values (A.T.V.) little change or benefit was seen from December 2015 because Visa, the 95% card market share holder in the U.K., did not alter its fees when the change came in to force, they acted early and brought changes to rates in March 2015 to make themselves largely I.F.R. compliant. Mastercard staggered their reductions in September and December 2015.

While the Merchant Service Charges have decreased it is questioned whether across the board card companies are passing on the whole benefit to merchants as they should and it is widely suspected that they are retaining funds via alternative charges. If unsure, ask the acquiring bank for clarification.
This matter is under investigation but any enquiry findings will take time to filter through as benefits to merchants.

From the 9th June 2016 merchants will enjoy more control over which cards they accept rather than the current system of accepting all cards.