Increasing credit card fees pose a challenge for retailers
15 December, 2021
Amazon's move to block UK Visa card payments from January has sparked much debate in the retail industry, leaving many businesses reconsidering their own management of credit card fees. Amazon has said it will not accept Visa credit cards in the UK due to the "high fees Visa charges for processing credit card transactions". However, following the global retail giant in not accepting such fees is probably only an option for the very biggest of businesses at least in the short term.
As a reminder, there are six parties involved in card transactions:
- The customer initiates a purchase from the retailer (also called the merchant);
- The merchant processes the information and passess it to the Gateway providers (such as PayPal and Stripe) who provide the terminals and charge small gateway fee;
- The Gateway provider routes the information to the Acquirer (such as WorldPay) which processes and underwrites the transaction if the merchant goes bust. They receive an acquirer fee;
- The Acquirer submits the authorisation request to the Card Scheme (the likes of Visa, Amex, Mastercard) which provides infrastructure and receives a scheme fee; and
- They in turn submit an authorisation request to the Card Issuer (such as RBS, Lloyds, Barclays) which approves or declines the transaction, underwrites the customer risk and receives an interchange fee.
Amazon's move to block UK Visa card payments from January has sparked much debate in the retail industry, leaving many businesses reconsidering their own management of credit card fees.
Card payments make up over 80% of UK retail spend. Given this myriad of fees, managing credit card fees has always been a real challenge for many retailers - with significant potential for over invoicing and incorrect charging
To add to this complexity, following the UK's exit from the European Union the rules have changed around the portion of fees for UK sales to EU card holders or vice versa (they were previously capped). Following a similar move by Mastercard, earlier in the year Visa announced plans to increase these interchange fees on behalf of the card issuers - on consumer credit card transactions fivefold to 1.5% and on debit card transactions nearly sixfold to 1.15%. The scheme fees charged by Visa will also increase. Both of these increases will particularly affect online retail, hospitality and travel businesses.
There are a number of remediation options for such merchants but unfortunately no easy answer. As previously noted only the very biggest merchants will be able to follow Amazon in not accepting the fees, given that there are only three significant schemes and refusing any one of them could seriously affect business. Passing on the cost may be more doable for merchants who operate in businesses which are not overly price sensitive but may be less attractive when price comparison is key. The final option is for UK merchants to set up locations in the EU or vice versa with all of the legal, operational and regulatory set up and ongoing cost involved.
Given there is no quick fix and the numbers can be substantial, I would suggest that before making any decisions, retailers should make sure they have a full understanding of charging structures, practices and costs of change so that any revised payment strategy has a firm basis. This can be done via a fee review, matching fees versus current or new contracts, or reviewing the effectiveness of process controls. To help merchants save time and money in determining the best solution, the review can be done using data analytics tools.
Of course in the longer term the increasing scale and complexity of fees for merchants when we purchase goods and services using credit cards is making many look at the development of cheaper payment methods using new digital tools and alternative payment providers. Leveraging open banking to send account to account payments being an example of this. This is a whole new topic and will be the subject of my next blog.
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