Are there storm clouds gathering for acquirers this Summer?

In our previous article “Did your numbers come up? The IFR lottery…” we discussed the unintended consequences of the Interchange Fee Regulation (2015/751) and evidence that so far consumers are yet to benefit from the EU’s intended price reductions.  The European Commission’s plans for a cohesive, transparent and ultimately more consumer friendly payment landscape haven’t quite gone to plan – so far.

On 9 June 2016, the remaining Articles of the regulation (7, 8, 9 and 10) were brought into force.  One of the most significant parts is Article 9 which legislates that acquirers must offer unblended pricing to merchants.

Could this be the missing piece of the jigsaw that helps those at the end of the chain see the financial benefits of the interchange capping?  The EU may believe so, but this could be wishful thinking…let’s explore this element and how acquirers have approached it.

 A confusing read?

In our experience working closely with acquirers in the run up to the implementation of Article 12 (transaction reporting), we gained valuable insight into the issues they were facing in preparing for Article 9.  Despite only having six lines of text, the resulting interpretive confusion and subsequent catalogue of questions is enough to fill the pages of a summertime bestseller!

Whilst the IFR text is a must-read for Optima staff summer holidays, it’s worth spelling out what exactly is meant by unblending? 

Unblending means that EVERY acquirer now needs to provide unbundled pricing in their first commercial offer to merchants from 9 June 2016 onwards.  They have to split out the elements of the amount they charge to separately show:

• interchange fees
• scheme fees
• their (merchant) charges

for each category and brand of payment card with different interchange levels.  Given the vast number of categories we’re talking about; this is a sizeable menu of bespoke pricing, a bit like the menu of additional fees from a low-cost airline!

The first question that you may ask is “do merchants actually want this?”  At Optima, we think the answer very much depends on the merchant in question.  For large retailers who have negotiating power over acquirers, ‘interchange++’ pricing is already commonplace, meaning that the interchange capping benefits will have already found their way to these entities – but perhaps not yet onto the shop-floor prices paid by consumers?

Most smaller merchants (despite the EU’s ideals), would actually prefer to stay on the blended pricing arrangements they have always enjoyed.  The “certainty” of blended fees means that a merchant knows exactly how much they will be charged for each card transaction and can plan accordingly.  A shopkeeper doesn’t have the army of finance experts employed by big retailers to analyse and forecast these expenses.

Implementation

The general lack of merchant appetite appears to translate into the approaches taken by acquirers in the market.  Literal interpretation of the regulation says that every merchant had to be offered and charged unblended rates as of 9 June  2016, unless the merchant expressly opted out.

We have seen several acquirers contradict these terms and ask their customers to opt-in or stay on their existing pricing structures.

We have also witnessed some acquirers make references to the reporting requirements being made available, and promote a slight reduction in blended rates glossing over the unblended option altogether.

It is no surprise that there are so many different approaches being taken across markets as each acquirer carries a different risk appetite with their regulators, and some are more commercially hard-nosed than others.  Coupled with the late appointment of competent authorities and associated guidance for enforcement, it is clear a lot of ambiguity still exists.

Take, for example, the recent guidance from the UK’s competent authority, the PSR (Payment Systems Regulator). This suggests unblended rates only need to be offered to existing clients when a commercial discussion of pricing takes place.  This gives acquirers the option to maintain blended pricing for as long as they don’t talk about fees!  This, however, is the UK’s position – other competent authorities haven’t yet followed suit and this makes life tricky for a pan-European acquirer.

 Tips to avoid getting burnt this summer

Keeping the holiday theme we’ve started – we thought it would be useful to share our best-practice advice and tips for keeping ahead of this regulatory challenge.  Think of it like getting ready for that upcoming summer break.

 What to pack?

A good holiday starts with a good itinerary.  Having a clear view of where you’ll be staying and what you’ll be doing, means you equip yourself with the right items in the suitcase.  Even if the taxi to the airport is waiting outside you wouldn’t want to throw the entire contents of the wardrobe into your case and hope for the best!

 Our experience indicates that many acquirers are still unsure of what Article 9 actually entails, meaning they don’t know what to “pack” into their strategy.  With the implementation date already having passed, acquirers need to be offering unblended pricing in their contracts to new customers, only offering blended at the specific written request of the merchant (and after they have seen an unblended proposal).  However, how to deal with existing merchant contracts is seemingly very much reliant on the guidance given by your country’s competent authority.

Our best advice is to stop stalling in devising your strategy, and get moving. Pick a course of action and adapt for changes as you’re furnished with more information or guidance.  If you wait to see whether the day will bring rain or shine before you get dressed, you might never leave the house to get that flight!

Talk to the locals? Seek advice

When you visit a new holiday destination it makes a lot of sense to get recommendations and advice from people that know the place.  They will help you to avoid the bad restaurants, suggest some great sights to take in and help you avoid making costly mistakes. 

Our advice for tackling unblending mirrors this approach.  Get help to understand the detail of what is required. How have others delivered? What are your options? What are the pros and cons of these approaches?

Whilst very clear rules and pricing have been set for interchange, unblending also requires full disclosure to the merchant of the per transaction scheme fee charge.  It is imperative that acquirers and other PSPs/ISOs get a good grasp of scheme fees in order to maintain commerciality and ensure that their pricing strategies are solid.

However, scheme fees can be difficult to comprehend for acquirers (and issuers for that matter) with billing manuals running to hundreds of pages of complex fees, charging periods ranging between daily, monthly, quarterly and annually, fees being subject to volume and spend tiering and also varying by transaction geography.  It comes as no surprise that acquirers find it difficult to break all this down into a simple transaction level amount to offer to the merchant, let alone understand how (and the frequency with which) it needs to be updated and communicated.

The recently completed acquisition of Visa Europe by Visa Inc is expected to

further shake up the scheme fees structures of Visa and, inevitably, MasterCard as well.  This just adds to the complexity in ensuring the longevity of the unblended offering you compile.

If you feel overwhelmed by the complexity or options, then seek out advice from those who know the landscape and have done the implementations.

Sun cream and hats!

Putting on plenty of sun cream and wearing a good hat is a pretty reliable strategy to help protect you from burning on holiday; however, it’s not fool proof, and if you put on the wrong factor cream you may still get burnt!

We see the engagement strategy with the designated competent authorities (CAs) as a good parallel here.  If you are talking to them about your proposed approach and why you are taking the decisions you are, then this much reduces the risk of compliance penalties.  It’s a form of protection from the regulatory heat!  Don’t wait for the CA to come to you!

We’ve also mentioned the differing levels of readiness in each member state, but we understand the Commission had each competent authority attend a session in Brussels on 9 June to provide their updates on progress.  Expect to hear the outcome of this soon, and we may find those reprimanded for poor progress becoming a little tougher with their acquirers as a result. Another reason to approach them before they come looking for you!

Read the small print

It always makes sense to read the small print on the hotel booking so you know when you can avail of the happy hour, and whether you need long trousers to dine in the restaurant of an evening.

Of course, 9 June  2016 also saw the implementation of Article 10 that prohibits payment schemes and acquirers forcing merchants to accept “all cards”.  The result of unblending and the transparency created by Article 12’s transaction reporting will allow a merchant to fully understand and make card acceptance decisions based on which cards are more or less costly to process.

Understanding the ramifications of this article means working through the detail of the small print.  Have you removed any such restrictions from merchant contracts? Are you prepared for merchants to demand selected acceptance of brands and products within? Should you offer some acquirer surcharging options to provide added value to a merchant and reduce the potential for them to selectively accept cards?

Finally, a word on the all-you-can-eat-buffet

We’ve all done it on holiday haven’t we?  We go to the international buffet and come back with a plate of 15 different cuisines – it seemed like a good idea to combine them all on my plate so I thought I’d give it a go!  Or maybe I figured I should have all eight flavours of ice cream together?

Whilst more of an issuer problem, we wanted to mention the consequences of Article 8 which is intended to allow consumers to choose, and retailers to promote, the most cost-effective payment method.  This article gives consumers the right to demand that their issuer combines or co-badges all card products that they issue to the consumer onto one payment card.

In theory this sounds a good idea.  A consumer doesn’t have a wallet full of

plastic to carry about and all their ice cream is in one cone!

However, this appears to be another theory-driven proposal that will be difficult to execute.

Firstl the issuer (buffet restaurant) will have to ensure that all the payment products (ice cream) you want are available to you and will fit on just one card (cone).  This will result in a complete redesign of traditional cards and operational processes in order to fit several different products together.

When a consumer is at a point of sale, how can they ensure that they get to decide which ice cream flavour should be eaten first?  The merchant will want to select his favourite (the payment method with the lowest costs) and will inevitably programme a priority into the terminal, but, ultimately, it should be the consumer that has the final say.

In order to facilitate this consumer decision-making acquirers will need to work with issuers and merchants to ensure that this choice is available and can be implemented effectively.

Of course, the deadline for these products to be available and accepted was last week. We think that it will be some time before the industry solves this one!

Don’t forget to write a review

The complexity and ambiguity of the number of articles in the IFR regulation means that it will be some time before the industry is able to declare a clean bill of health of compliance.  Thursday 9 June 2016 has passed with the majority of stakeholders being neither quite ready nor compliant – and certainly not to the level envisaged by the regulators in Brussels. 

Learning from good and bad experiences on holidays is a must.  Don’t repeat the mistakes you made and try to do the things you enjoyed again!  Sometimes you also need to accept that you won’t have as good a time next year.

We know that regulators in some markets are already talking about further interchange caps as they do not believe they are seeing the benefits flow through to merchants and consumers.  Addressing the current regulation effectively would go a long way to preventing further pain down the line.

We shouldn’t forget, however, that the IFR regulation has a built-in review point in June 2019 (Article 17) to assess the effectiveness of this legislation.  Paragraph ‘(k)’ specifically will look at whether a €0.07 value cap is required for debit medium and high-value transactions (from the current 0.20 percent).  Given an overall average ticket of €58 today in Visa Europe this would push average interchange down to something like half of the level today at 0.11%. Unlike the cost of holidays, the price is only heading one way.

We hope the holiday theme hasn’t got you packed up for summer already as there is lots still to be done to comply with the IFR regulation. We shouldn’t expect this to be the last of it - a bit like that couple who won’t stop talking about their wonderful holiday last year!

Please get in touch if you have any comments, feedback or interest.  For details of our IFR best-practice implementation workshops, scheme fee & other customised support options visit us at Optima Consultancy or email [email protected]