The rising cost of accepting card payments

Struggling through a recession has made British retailers more determined than ever to tackle rises in the merchant service charge (MSC) paid on every card transaction. The British Retail Consortium (BRC), in its Cost of Collection Survey, published in June, highlighted that bank charges for handling debit card payments have almost doubled in the past five years. The organisation has demanded Visa, MasterCard and the banks reduce these charges, saying the average debit card transaction now costs a retailer 8.5p in fees, compared with 2.1p for cash, and a massive 34p if a credit card is used.

Call for intervention

Now a new enemy has emerged. Retailers are angry that banks are issuing ‘premium’ credit cards, which reward cardholders with Air Miles, loyalty points and extra services, but punish retailers with higher transaction fees. Interchange fees - which make up a large part of the MSC and are set by Visa and MasterCard - are being investigated by the European Commission, but the BRC and its members would like to see Business Secretary Vince Cable intervene now at a domestic level.

“It’s tough times for us and costs are everything,” says Morrisons group treasurer Paul Coyle. “We would normally expect to have a control over a cost this size, or at least be able to have discussions about card fees, but we simply don’t have that kind of relationship with the issuing banks, the acquiring banks or the card schemes. We’re just told rates are going up and that’s it. It’s an issue that has got to the boardroom with retail leaders around the country asking, ‘Why the hell are we paying this much?’”

For Coyle this “odd commercial arrangement” won’t go unnoticed much longer. “The changes are too great to stomach and retailers now feel the banks are generating more profit for themselves at a direct cost to us,” he says. “For instance, if a customer’s standard credit card is upgraded to a premium card, we’ll see the interchange fee double overnight, typically going from 0.8% to between 1.3% and 1.7%. And whereas we were happy to pay 6p for a debit card transaction to be processed, that suddenly rose to 8p when some leading banks moved their debit card customers from Maestro to Visa Debit, and that’s a 33% increase in the fee. When you’re processing millions of transactions a week those massive additional costs stand out.”

Both RBS/NatWest and HSBC have moved their debit card customers from the Maestro payments system, owned by MasterCard, to Visa in the past 18 months - just one example of retailers having no control over rising costs.

BRC policy adviser Richard Braham says retailers are now “considering the options” open to them to address a host of concerns. The organisation says it is committed to generating media attention on this issue, and is working hard to keep interchange fees on the agenda of the Office of Fair Trading (OFT).

“Retailers are not given a breakdown of what constitutes these charges,” says Braham. “There are suspicions that retailers are paying not just for the operational and security elements you’d expect in processing payments, but possibly for the banks’ marketing and loyalty schemes too.” He adds that the latest multifunctional cards coming through that will pave the way for contactless payments are also being viewed with suspicion.

“There’s obvious concern that banks plan to make the higher debit card charging regime the norm for contactless and mobile phone payment methods,” he says. “Retailers could face huge increases in their costs as these new ways of paying gradually replace cash. Inevitably the extra costs would be passed on to consumers through higher prices.” He says ‘surcharging’ - retailers charging customers a fee for the card transaction as some small shops do - is anti-competitive and not an option in today’s market. The Honour All Cards rule, where merchants must accept all variants of cards within the schemes they’re part of, could be an area that retailers demand is addressed.

Smaller retailers are particularly vulnerable and, not surprisingly, there’s been “adverse reaction to the cost of handling premium cards” recently, says BHF-BSSA professional services director Bob Jarrett, whose body represents independent retailers. “Our members have benefited from the ‘blended rate’ we negotiated for them, which means the costs have been contained, and they haven’t had to pay a surcharge for accepting higher-rate commercial cards unless their use exceeds an agreed threshold,” he says. “Now in an unprecedented move we have the acquirers saying they cannot absorb the premium card costs any longer and retailers will have to pay a rate for premium cards outside of the blended rate.”

What upsets these retailers most is that they cannot identify premium cards at the point of sale, and under the Honour All Cards agreement cannot discriminate against their use anyway. “It seems to our members that they are paying for the bells and whistles being promised on these cards, when really they just want to pay for the cost of processing them,” says Jarrett.

Acquirers are trying to improve transparency in their invoicing systems and this should at least help retailers identify the higher cost cards coming through, says Darren Wilson, chief executive of HSBC Merchant Services, an acquiring bank. “We have changed our invoicing systems and statements now so that retail customers can identify premium card fees.” He says continued pressure in the card industry around pricing for the customer has squeezed margins for all parties, so passing on the cost of higher interchange fees is inevitable.

Maximising benefits

When asked to justify the increased interchange fees, a MasterCard spokesman says: “Interchange fees are neither more nor less than the difference from the face value of a card transaction required to balance costs and benefits between cardholders and retailers.” He adds: “MasterCard itself doesn’t receive any revenue from interchange fees; it merely sets them according to market conditions and with an eye to maximising consumer and retailer benefits.”

MasterCard is also keen to highlight the benefits retailers would see from customers using its premium World cards, designed specifically for “the mass affluent segment of the credit card industry” - people who will spend more if treated well. “Affluent consumers want to be recognised for their superior spending power. So MasterCard believes that we have a shared target customer with UK merchants and acquirers and we know that these consumers want to be treated as a valued customer by everyone who wants their business,” says the spokesman.

MasterCard believes its premium card provides merchants with “a tool to recognise and reward this value-driven, service-oriented consumer”. “And considering strong competition from Amex and Diners Club, it is in the interest of merchants to see healthy competition in this segment,” adds the spokesman.

Superior product

Visa Europe also defends its corner, saying it does not have any premium cards and that when some banks switched from Maestro to Visa Debit the increased interchange fee was justified because of the additional services offered. “Maestro didn’t have global acceptance, didn’t have wide ecommerce acceptability and didn’t have adequate consumer protection, so we were introducing a superior product that necessarily comes with a higher cost structure,” says Visa Europe vice-president Simon Kleine.

Visa insists its interchange fees have not changed significantly in recent years, “and in many cases have reduced where new, lower, incentive rates have been introduced to help promote secure transactions and new technology such as Visa Contactless”. The card scheme is keen to remind retailers that interchange fees are indispensable for card payment systems to work effectively and are “to everybody’s advantage”. “Interchange is set at a level that encourages banks to issue cards, retailers to accept them and consumers to use them,” says Kleine.

“Reducing interchange fees would hurt consumers, as it would reduce investment in security, innovation and payment efficiency.”

After years of condemning card payment charges, Tesco is less vocal than it was. Not surprisingly, perhaps, as Tesco Bank’s own premium card, the Tesco Finest World MasterCard, now carries a 1.3% interchange fee. “Interchange fees are not set by Tesco Bank but by the card schemes and are applicable to all card issuers in the UK,” says a spokeswoman. “Tesco reinvests the bulk of the income in rewarding customer spend and covering the cost of processing transactions.”

The complexity of the payment card system means it’s easy to pass the buck when asked where charges come from and where the profits go. But as the benefits of contactless payment become clear, retailers will continue to demand more clarity and reassurance that excessive charging won’t spoil the party.