What fun it is in the payment sector to see the what appear to be unconnected Mastercard announcements, almost in the same week, but think again…..:
Firstly because the UK left the EU (and the EEA) in January 2021, Mastercard announced the increase of interchange rates for online cross-border transactions in the EEA on UK consumer cards. And vice versa. i.e.:
Consumer debit and credit interchange rates are 0.20% and 0.30% and will rise to 1.15% and 1.50% respectively from 15th October 2021. Acquirers will therefor pass-on this additional cost to merchants, to offset these rises with increases in fees of about:
475% on consumer debit cards and
400% on consumer credit cards.
Visa has not followed (yet), and initial indicators suggest that it will not do so, but it may take advantage in other ways.
Issuer revenues will rise with no new costs or risks on these transactions. Mastercard may not gain financially itself unless it also increases these cross-border processing fees too: but the possible impact will include:
Merchants rebel and steer consumers to use Visa cards, and in the confusion ‘retaliate’ and avoid all card transactions, (not just the online cross-border ones). And maybe this is why Visa have adopted their ‘wait and see’ strategy.
Merchants steer customers to other forms of payments - account-to-account payments for example. When monopolistic impositions are disliked, merchants will then likely react.
Merchants may increase prices, may attempt to surcharge customers or offer multi-currency pricing to offset these new costs with forex income.
Merchants may need to relocate processing to take advantage of lower domestic pricing.
Loyalty and reward programmes may find a new viability – but this is less likely, as new interchange revenue may not be significant and programmes can be costly to run.
New fintech start-up issuers with international and cross-border travel focus will benefit.
More acquirers will blend merchant pricing. But Visa may well remind acquirers that they are prohibited to subsidise more expensive or competitor transactions.
Are the volumes of these transactions significant outside of say, T&E merchants? We need to remember that many of the big-name online retailers that UK cardholders use, process in for example, Ireland or Luxembourg; will now need to adjust their payment acceptance strategies.
There may now be ‘media noise’ about ‘which cards to take abroad after Covid-19 restrictions ease’.
NatWest Group switch to Mastercard - how connected was this announcement of the NatWest Group debit card conversion decision?
Visa branded debit cards still predominate in the UK, so Mastercard may aim to make further such deals there, but these may be costly to incentivise.
Before we castigate Mastercard, we must note that it is simply deploying today’s default non-EEA-country rates, as the UK leaves the EEA. It is nonetheless hard though to fathom this dramatic rate hike: as the costs of processing before and after 15 October 2021 will not increase. Rest assured, European regulators must ask questions about exactly this.
Mastercard announced that consumers and retailers will not be impacted. But this argument is rather nonsensical as we can’t imagine that acquirers or merchants will simply absorb the new costs.
In a Twitter/ networked media: the public, consumer groups, and industry observers, and regulators are likely to engage and challenge this: especially when big merchant groups join this debate.
The increase EU consumer and merchant costs may now also fuel EU and UK regulators to challenge these Mastercard fee increases. This may then also accelerate a faster and more radical adoption of open-banking and push payments to displace Mastercard/ Visa infrastructures and lower costs in Europe .
But did Mastercard increase charges to leverage the NatWest deal and migrate 16m debit cards to Mastercard? Traditional NatWest cardholders may well not like the inconvenience and the potential long-term hidden costs.
We do not know the answers, but can see that a 400% or more increase in these transaction costs will cause further debate and reactions with:
All parties in Europe reviewing their costs and benefits to work-out what to do next.
Additional costs will not be absorbed by merchants but passed on to consumers
Increased costs of goods and/or services purchased by Mastercard (or all?) cardholders
Some major online retailers that move processing jurisdictions to circumvent the additional costs
A migration towards open-banking push-payments for lower cost transactions
More EU and UK regulatory wrath and intervention.
A general distrust of Mastercard far exceeding the advantages found within this change.
An uncertainty about the next steps taken by Visa.
Author Bio
With over 25 years in the payments business, Kevin Smith and Bill Trueman are trusted and experienced practitioners and thought leader in payments, technology, issuance, acceptance and acquiring.
About Riskskill
Riskskill is a leading Europe-based payments and risk management consultancy having a team of independent risk advisors. Riskskill.com is a global GARS Reviewer for Visa. For more information visit website at www.riskskill.com