On the 1st of March 2015, Visa are changing the way that they charge for processing debit card changes.
For most businesses, the change will mean higher costs, but there is a lot of confusion still surrounding the changes and what they will mean in practice for businesses which accept debit card payments.
If you have had a letter informing you of debit card processing cost increases and you would like some free advice, then send it to us at email@example.com and we’ll be happy to help.
Who the Changes Affect:
Firstly, it’s important to remember that Visa are not a processor. They do determine the bulk of the cost that the processors have to pay though (this is called interchange), so when they change their interchange cost it changes the underlying costs that all the payment service providers have to pay. So if interchange goes up, it’s a fair assumption that the payment processors will pass that increase on to their customers. The changes are therefore set to affect every business that accepts debit card payments.
So here’s what’s happening to visa debit interchange from 01.03.2015
Visa debit interchange is currently calculated as 8 PPT, or 8 Pence Per Transaction.
Under the new scheme, it will be calculated as:
For secure consumer card payments:
0.2% of the transaction value + 1 PPT with a maximum interchange charge, or cap, of 50p per transaction
For non secure, e-commerce & MOTO consumer card payments:
0.2% of the transaction value + 11 PPT with a maximum interchange charge, or cap, of £1.00 per transaction
For secure business card payments:
0.2% of the transaction value + 1 PPT with a maximum interchange charge, or cap, of 75p per transaction
For non secure, e-commerce & MOTO business card payments:
0.2% of the transaction value + 11 PPT with a maximum interchange charge, or cap, of £1.50 per transaction
The Bottom Line:
The major UK processors are each responding differently to this change in their cost base. Here are some examples that typify what we are seeing (figures are per month):
Lloyds Cardnet seem to be absorbing the PPT element of the new interchange charge.
The new rates that they are charging merchants are calculated using each merchant’s ATV (Average Transaction Value) and are clearly intended to minimise the impact of the changes on the merchant. For example, they provided the following to one client with high average transaction values for debit cards:
|Current Visa Debit Turnover||£18,000|
|Number of Visa Debit Transactions||60|
|Average Visa Debit Transaction Value||£281|
|Rate Before 01.03.2015||19.5ppt|
|Rate After 01.03.2015||0.26%|
The cost to the merchant is obviously greater with the new charges. In fact, it rises from £11.70 to £46.80 – almost a four-fold increase!
However, the Interchange cost that Cardnet have to pay to Visa for processing these transactions rose from £4.80 to £36.60 – roughly a seven-fold increase!
Lloyds Cardnet have provided a fair pricing. N.B. Pricing negotiated by CPRAS
The GlobalPayments charging structure is more complex than any of the other Processors. This complexity can make it hard for business owners / FDs to understand the principals of how they are charged, but essentially all the same principles apply.
The example below is a local council:
|Current Visa Debit Turnover||£28,393|
|Number of Visa Debit Transactions||1,785|
|Average Visa Debit Transaction Value||£15.91|
|Rate Before 01.03.2015||14.4ppt + 1.37ppt + 0.015%|
|Rate After 01.03.2015||9.8ppt + 18ppt + 0.2% + 0.0025%|
The cost to the council is going up from £286 to £554
Yet the cost to GlobalPayments has decreased from £143 to £74
The margin that GlobalPayments are extracting from this merchant has therefore risen from £142.95 to £479.09
In a letter to the council, GlobalPayments say:
“Currently, Visa charge a pence per card rate for debit cards. From 1st March 2015, this charge will be based on a percentage of the transaction value plus a pence per card rate for each debit card transaction. This change will alter your headline rate and Interchange Differential Fee (IDF) Table for Visa cards. Your new Visa debit headline rates will be: 0.2% + 9.8p. This means that lower value transactions will now attract lower fees than they had previously, due to the percentage rate now being applied, instead of a fixed fee irrespective of the transaction value.
Your new IDF rates are listed below”
Whilst the statement by GlobalPayments that lower value transactions will now be cheaper to process is true, this is disingenuous. The new “Headline” rate that they have proposed would mean that some visa debit transactions would be cheaper to process if everything else remained the same. However, they have also dramatically increased their “IDF” rates – making savings impossible regardless of the transaction value.
It would seem that GlobalPayments have used the confusion caused by the interchange changes, coupled with the complexity of their own charging system, to maximise profits at the expense of their client.
From the accounts we are seeing, Worldpay are taking a similar approach to Lloyds Cardnet i.e. they are not offering to pass on the “cap”, but are analysing average transaction rates carefully and setting a percentage charge rate which mitigates the increased cost to the merchant as much as possible.
The example below was a re-pricing for a small local government merchant:
|Current Visa Debit Turnover||£17,558|
|Number of Visa Debit Transactions||736|
|Average Visa Debit Transaction Value||£23.86|
|Rate Before 01.03.2015||15ppt|
|Rate After 01.03.2015||0.5%|
On the surface, WorldPay are making a huge mark-up here – 0.5% charge when cost is just slightly over 0.2% is obviously a margin of approximately 150%. When we compare this to their previous margin of <100%, it looks like WorldPay are profiteering from the Visa Debit interchange changes.
However, the reality is, that WorldPay here are actually reducing their margin in real terms. The cost to this merchant for processing debit cards is, in fact, going down substantially – from £110.40 to £87.79.
Of course on single card type can be taken in isolation when determining the net cost of a merchant account re-pricing. For many merchants, a 10% increase in their Visa consumer card rate could easily offset any savings from their debit card rate.
In this instance, however, WorldPay maintained all other rates.
RBS WorldPay have passed on the Visa debit card price rise in a more-than-fair way. They have considered the average transaction value carefully for this merchant and have actually provided a net saving.
It seems that Barclaycard are choosing not to amend merchants’ rates at this time in response to Visa’s debit card interchange changes.
Obviously, this is good news for merchants with high debit card receipts and average transaction value, but not good for merchants with a low debit card average transaction value.
In any case, it can only be a holding position and changes are certain to come.
If you have a high Visa debit average transaction value, then see if you can lock-in your current ppt. However, do not lose sight of the bigger picture – increases for other card types could easily wipe out any savings you achieve for Visa debit.