Changes to credit card payments & the effect on businesses

If you and your business use a credit card, a debit card or you accept payments from Visa, MasterCard or ePAL (eftpos)...(there’s only $450 billion a year spent on these in Australia….), this November, your costs could increase or decrease by thousands of dollars per year. You didn’t know? The purpose of this article is to help you understand a little about how payments work and why November is important so we can ensure the best outcome for you and your business.

Why is November 2015 important?

Let’s look at this in 2 parts, 1) The ‘regulation’ and 2) What this means to you.

1 - The regulation

The RBA regulates the payments industry (credit and debit card usage in Australia). Every 3 years the costs associated with transactions are reviewed and reset (the next one is in November 2015) - these costs are referred to as interchange (what is interchange and how it works will be covered later in the article). The purpose of this is to ensure that Visa, MasterCard and ePAL (cheque / savings button on a terminal) operate within the cost guidelines the RBA has set. American Express and Union Pay International (UPI) are not subject to the same regulation (there are long winded reasons why and unless you want to work in the payments industry I wouldn’t worry too much about it).

2 - What this could mean to YOU

Credit/Debit card holder

• Fewer benefits from your card
• Fewer reward points
• Loss / limits to airport lounge / concierge services
• Loss of some insurance products
• An increase in the other fees you are charged for the card (ie annual fees)

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If you take payments (either face to face or online)

• Your costs should fall
• Your costs could increase and increase significantly in some industries
• The pricing structure you are on will be critical

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Whether you make payments, receive them or both, the Tips for November section will help you steer your business through these changes – the decisions you make may have a substantial impact on your business.

What are these costs and how does it work?

The costs are referred to as interchange and at a simple level operate as shown in the diagram:

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• The shop takes a payment from the customer. This could be a coffee shop, an accountant, a major supermarket, a Toll freeway or a plumber (anyone who takes payments). The shop pays a Merchant Service Fee (MSF) to the acquirer – this will typically (there are some exceptions, but this is the most standard way) be a fee which is a % of value of the transaction if the card is credit or cents per transaction if it’s a debit card.

• The terminal - either on the shop counter, an online payments website or some other mechanism which takes the payment and sends the card and transaction details to the acquirer. The acquirer takes the payment and deposits it in the shops bank account and sends the transactions details to the issuer (financial institution who the card is with). The charge for processing the transaction is the MSF paid in step A, they then pay a percentage of this to the card issuer (the company who owns the card relationship). The fee that is paid to the card issuer is called interchange. Interchange is regulated by each of the schemes individually, ie, Visa/MasterCard/ePAL – the banks and merchants must play by their rules (ie an acquirer cannot decide to pay a lower rate of interchange to another financial institution without agreement – and no issuer is going to agree to lower revenue as it’s not in their businesses interest).
• The issuer uses the funds from the interchange to pay for benefits to the card holder – loyalty points, airport lounge access, travel insurance etc. In parts of the business commercial card sector, this includes paying a rebate to the commercial card customer.

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So now you understand how the payments flow, how does this relate to November and impact the profit line for your business?

How Interchange works

Visa, MasterCard and ePAL are each able to set their own interchange structures (called hierarchies in the industry). The only thing they have to do is operate to a maximum total blended cost as defined by the RBA which are:

• 0.5% of the value of credit transactions.
• $0.12 per transaction for debit transactions (note Visa Debit and MasterCard Debit are treated as Debit not Credit and are subject to $0.12 the same as ePAL).

So a credit payment means the issuer gets paid 0.5% of the value of every transaction? No, unfortunately, it’s not that straightforward. There are lots of different interchange categories (over 80 domestic rates in Australia at last count), so let’s take a simple example as to how the 0.5% is calculated.

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In this example (representing the entire payments system) there are 2 interchange rates, 0.3% and 0.6%. To calculate the total interchange we multiply the spend by the rates:

• $100 x 0.3% + $100 x 0.6% = $0.90 total interchange

To calculate the total interchange rate we divide total interchange by total spend:

• $0.90 / $200 = 0.45% interchange rate for the market

This example means we are below the 0.5% ceiling so the scheme (Visa / MasterCard) are compliant with the regulation. If you remember from before there are in excess of 80 different interchange categories and rates in Australia. Each of Visa/MasterCard/ePAL can set their own hierarchy of rates for different transaction types (Credit and Debit). This makes things a lot more complicated for us than in our example above.

Simplify it down to 5 drivers:

• Industry - some industries get special rates and so all other rates are irrelevant, examples include (but not limited to) charity, petrol and government

• Business - some large businesses get preferential rates from the schemes, these are generally very large retailers on the high street – again in this situation all other rates are irrelevant

• Transaction type – examples include contactless transactions and cash out (remember that these may not apply to all 3 schemes)

• If your business is not one of the named industries and is not one of the named businesses then we will look at the type of card being used in the transaction, eg Platinum, Corporate, Low Rate – these have different interchange rates

• If none of the above apply then a base rate will apply

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It’s important to note that each of the schemes is free to set their own interchange hierarchies, for example just because one scheme decides to have an education rate it doesn’t mean the other schemes will. Also, just because they have the education rate on Credit does not mean they will necessarily have it on Debit (or vice versa).

Why the interchange rest is important to your business

As you will have noticed through your business or even as a consumer, there has been a constant growth in card types in the market, Low Rate cards became Gold, Gold became Platinum and now there are lots of above Platinum cards in the market. What this means is that the schemes may go above the 0.5% or $0.12 thresholds so need to bring that blended rate back down under those rates, so they achieve this through changing the hierarchy and / or rates for card types. So that is how it works…still with me? Right, let’s look at what it means to you in November and some tips to ensure the best outcome for your business. As previously mentioned, as long as each of the schemes adhere to the blended RBA rates of 0.5% for Credit and $0.12 per transaction on Debit they can completely change their hierarchies and do what they feel is best for them to grow their business and support their customers – it may turn out to be good for your business or it may not.

Tips for November

If you accept payments

• Think through if you want to get your merchant price reset before November unless you are on interchange plus pricing (ie you can see all the interchange categories on your bill from your acquirer). If you do get your price reset now it is likely you will lock in the current rates into your blended MSF for 12 months. Remember that the chances are that your blended interchange costs will come down, if you process $1m a year and your interchange costs for your business drop 0.1% this is $1,000 a year you will be out of pocket.

• Check the current interchange hierarchies (on the websites for each of the schemes) and see if you are on an industry rate (eg petrol etc), if you are check to see if you are once the reset comes in. For example if you run a petrol service station and petrol was to be removed then your business would be potentially $5,000+ a year out of pocket under the new structure (based on the RBA average MSF rates).

• If you don’t feel you have a fair rate from your current acquirer speak to other acquirers after November, their rates are likely to be better than if you got a quote now as you will get the current interchange prices and not the new ones.

• Look out for a growth in non Visa/MasterCard card types – eg American Express/Diners, the banks may encourage cardholders to use this card type (ie for the cardholder to get more reward points). Make sure you have the best deal from your charge card relationship as these costs could grow in the next 12 months. It is also worth bearing in mind if you don’t accept these cards today and customers are going to be encouraged to pay this way you may risk losing out on sales.

If you make payments

The following applies to both consumer and commercial cards:

• Using a credit card comparison website it currently requires (on average) $19,300 to get a $100 voucher. The RBA reported in 2011 it required $18,400, in 2009 in was $17,000 (I think you can see where this is heading…). After November, we may require an average spend $20,000+ to get that $100 voucher, does that still make sense to your business?

• Watch for reduced benefits on your card, not just fewer reward points but also lounge access etc there is competition in the market – look at the banks websites and card comparison websites – the differences can be significant to you.

• Watch for increased fees, annual, rewards membership etc.

• For larger businesses who get paid rebates, watch to see if this gets reduced, look at the old and new interchange hierarchies, does your product still have a specific rate (eg Platinum)? Is it still at the same rate? If you see the rate reduce or go altogether you can reasonably expect this to be passed onto you quickly in the weeks and months following the reset- and this could be significant to you –potentially $10,000+ p/a. If this happens review the market and speak to your bank to understand if your product is still competitive.

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Hopefully, you now have an understanding of why November 2015 is important and some of the things to think about if you make or receive payments to ensure the best outcome for your business.

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