Lower Interchange in the UK: A Well-Kept Secret

Visa and MasterCard sure can keep a secret.

They lower interchange for contactless debit card transactions in one of their key target markets for contactless payment, the UK, and don’t tell anyone.

Why, even the big merchant lobbying group, the British Retail Consortium, or BRC, apparently didn’t know.

In June, when the group released the results of its annual cost survey–which it said pegged debit card merchant fees at four times the cost of cash and rising–it added that retailers were “seriously concerned” banks would make the higher debit card fees the norm for emerging contactless and NFC payments. In that case, merchants would have to pass on even more card costs to consumers, warned the BRC, which did not spare the dramatics in calling on the recently installed Conservative government of David Cameron to intervene and “clamp down on irresponsible banking behavior.”

A BRC spokesman told me more recently he didn’t know about the lower interchange for contactless debit, which would translate into much lower fees for merchants. If true, it’s a good start, the spokesman said, adding: “It shouldn’t just be costs for contactless payment, but for all types (of cards).”

Of course, there’s little doubt the retail lobbying group has known about the lower contactless interchange rates, which have been in place at least since February. But the rate cuts by the card schemes don’t fit well with the BRC’s narrative of merchants being fleeced by banks.

And for their part, Visa and MasterCard are not so eager to publicize the lower interchange, lest merchants use it as a wedge to demand lower fees for contactless credit and for contactless transactions in other countries. And, of course, as the BRC spokesman said, why not lower interchange for all types of card transactions?

One British merchant who did not miss the significance of the interchange cuts is Roy Ford, retail IT controller and head of card strategy for Spar UK, Britain’s largest convenience store chain.

Ford figures the lower merchant fees Spar’s stores will pay on debit contactless will make contactless an even lower-cost option than cash, which costs the 2,600-store chain 1.5% to 2% to handle and secure.

Ford, in fact, told me lower card-transaction fees is the top reason Spar has decided to roll out contactless readers throughout the chain–the first big UK merchant to announce such a move. Cost savings are more important than speed and convenience, though that is an important benefit of contactless, too, he said.

With the lower interchange for contactless, which is passed on by acquiring banks in the form of lower merchant fees, Spar would pay charges of only half a percent on an average debit card transaction of £7.50 (US$11.70).

Visa Europe, in February, set interchange on its payWave debit transactions in the UK at a flat 4 pence (US 6.2 cents) for purchases of between £2 and £10, compared with 8 pence for conventional debit chip-and-PIN transactions. Very low-value contactless debit transactions, of below £2, incur interchange of only 1 pence, according to the Visa rates. Visa had cut interchange for contactless transactions before in the UK–as early as the fall of 2007 to coincide with the launch of contactless payment in the UK. But even fewer people knew about those cuts.

The maximum transaction amount for which UK consumers do not have to insert their cards into terminals and enter their PINs was increased from £10 to £15 earlier this year. But Visa did not cut the interchange rate for transactions above £10. MasterCard has set its most recent Maestro debit rate in the UK to a flat 3.88 pence, though it’s not clear if that extends to £15. MasterCard also cut interchange in Italy earlier this year to try to jump-start a rollout of its PayPass contactless application there.

Besides the lower fees its acquiring bank passes onto it, Spar will get a little bit sweeter deal on fees for contactless transactions from the acquirer, the Royal Bank of Scotland. The bank, however, has sworn Ford to secrecy on the actual rate.

It helps to have a strong negotiating position, which comes from representing  more than 2,500 stores. Ford has had three banks tendering for his acquiring business and one, Barclaycard, offered to pay for all or part of the cost of contactless readers. But they would be for standalone contactless terminals, which would require clerks to rekey data for each contactless transaction.

All told, Ford told me the return on investment for the readers Spar is buying for 7,000 point-of-sale terminals in 2,600 stores, along with other costs–including an integrated POS terminal system for most of the stores–is less than 18 months. The chain would achieve that low ROI, however, only if all the chip-and-PIN debit card transactions it now accepts moved to debit contactless.

There’s little chance of that happening anytime soon, even in the 18 months it will take Spar to roll out contactless readers in all of the stores. So the ROI will take a little longer. There are only about 5 million contactless debit cards on issue in the UK, most from Barclaycard’s parent Barclays. That is in addition to perhaps 4 million contactless credit cards on issue from Barclaycard itself.

While total contactless card numbers in the UK are projected to increase to 12 million by the end of the year, the lack of a large card base is one of the main reasons large British merchants are staying on the sidelines when it comes to contactless payment–despite the lower interchange.

Barclaycard has predicted other major British banks will join it next year in rolling out contactless cards, which could total 30 million cards by the end of 2011. If true, this combined with the lower fees could win over more merchants, who are not singing the speed-and-convenience tune.

So it might pay for Visa and MasterCard to make more noise about their lower contactless interchange rates. Of course, given the contentious nature of interchange, don’t count on it.



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