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How will changes to card processing fees affect small businesses?

The European Parliament has voted to cap the fees retailers pay to process card payment transactions. The European Union (EU) believes this will reduce costs for businesses and ultimately customers. We take a look at the implications for small businesses.

The EU has voted to fix interchange fees. Every card transaction involves a charge by the card issuer known as the interchange fee. It’s a small fee paid by a merchant’s acquiring bank to a cardholder’s issuing bank. It’s part of the electronic card transaction process.

In theory the cap should be good for businesses that accept card payments because it will mean lower card processing fees. But as is often the case – it’s not so simple.

Interchange charges for debit cards will be capped at 0.2% (presently 8p). Credit interchange fees will be capped at 0.3% (presently 0.77%-0.8%).

The European Commission suggests this will save retailers around €6 billion a year and consumers around €730 million a year.

Debit transaction charges had been a fixed at 8p/18p per transaction. This will change to 0.2% of the transaction value plus 1p/11p for secure and non-secure transactions respectively.

From the beginning of April MasterCard will lower interchange rates for its ‘premium’ credit cards to 0.8%. MasterCard will also gradually reduce the consumer credit card interchange fees. It’s expected they will begin this process in mid-2015 so that they achieve the 0.3% level required by the EU by the middle of next year.

Will the changes to debit card fees help small businesses?

Debit card fees in the UK had been based on a fixed rate for each transaction – 8p for chip and pin transactions.

Before the changes, a typical debit card transaction could cost a small to medium sized business 14 pence. Debit card costs don’t change according to the value of the transaction. It’s a fixed cost. It means that a merchant will pay exactly the same for a £5 debit transaction and a £200 debit transaction.

The new interchange costs will mean a change from fixed rates for each transaction to a percentage of the value of the transaction. It means that if the transaction value is higher then it will mean higher interchange costs.

An average transaction value of £35 will mean interchange fees stay the same at 8p per transaction. Lower than £35 and the fees are lower than 8p per transaction, so cheaper for the merchant. But for transactions above £35 the interchange fees become higher. For example, a transaction of £245 will mean interchange charges of 50p far more than the current 8p charge.

Those benefitting the most will be those with a low transaction value. Merchants with a higher transaction value will see costs increase.

How will credit card fees change?

Credit card transactions are a different matter. Currently a typical credit card transaction can cost the average small to medium sized business 81.5 pence to process. Merchants who accept credit card transactions should benefit. The changes will mean payments will be capped at 0.3% – lower than the current interchange fees of 0.77%-0.8%.

The new charges mean merchant acquirers will no doubt change their pricing models. How they decide to do this will depend on several factors. Factors such as the transaction values the merchant undertakes, the card mix, and competitor strategy will be taken into account. Not all merchant acquirers will choose to adopt the same pricing strategy.

Most small and medium sized businesses in the UK are on “blended pricing”. This means the acquirer has complete discretion on how the changes are passed on.

So as a merchant what can you do?

You should check your pricing structure and ensure your acquirer passes on the changes without increasing their margins. And make sure you keep up-to-date with any changes in the regulations.

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