Rise In Card Interchange Fee 2022: What Merchants In Europe Need to Know

The Debate Around Card Interchange Fee Hike

You must have heard the news: starting April 2022, card interchange fees on cross-border transactions between the UK and the EU will increase. An interchange fee is a fee that merchants pay to the cardholder’s issuing bank for every card payment.

Both Visa and Mastercard will charge 1.5% on credit card payments made online or over the phone between the UK and EU, up from the earlier 0.3%. The revised fee on debit card payments will be 1.15%, up from 0.2%. Following the UK’s exit from the EU, card transactions between the UK and the EU have been re-classified as “inter-regional” transactions and hence subject to the revised fees.

What this means is that a merchant in the EU selling to a customer in the UK will have to pay a higher interchange fee for card payments.

According to Financial Times, Visa also plans to increase fees on UK-EU transactions from July 2022 while charging more for domestic payments made using UK-issued credit cards. Both Visa and Mastercard, the dominant card schemes in Europe, have made headlines over these plans.

Why is Card Interchange Fee important?

These changes could cost merchants in the EU around €202 million more every year to accept cross-border card payments, as per global payments consultancy CMSPI estimates. Merchants in the UK could pay €138 million more annually.

The UK is the largest e-commerce market in Europe and stands fourth in the world. In 2020, e-commerce revenue from the UK totalled over € 91 billion (USD 104 billion). And it’s getting bigger – some stats say that in 2021 online shopping revenues from the UK will exceed € 167 billion! But as cross-border e-commerce grows, the cumulative impact of these additional charges would be felt by merchants and consumers. There are fears that consumer prices could rise, affecting airlines, hotels, car rentals, and travel firms that rely on international card payments.

What Is Interchange Fees and Why Does It Matter?

An interchange fee is a fee paid by a merchant to the cardholder’s issuing bank. For large merchants, it can be 80% of the total cost of accepting card payments. Card schemes (Visa, Mastercard/ Amex, etc.) decide this fee based on different factors and levy it on all card payments, domestic and cross-border.

As per the new rules, Visa and Mastercard will charge 1.5% on credit card payments and 1.15% on debit card payments made online or over the phone between the UK and EU.

The European Commission mandates a cap of 0.3% on credit card interchange fees for all payments within the European Economic Area, plus Iceland, Norway, and Liechtenstein. But with the UK no longer being a part of the EU, these caps will not be valid.

Usually, these card processing costs are either absorbed by the merchant or passed on to the customer in the form of increased prices or surcharges. Thus, a higher interchange fee means more money out of your revenue, higher prices, and extra charges for the customer. Not good for the customer experience, this.

How Should You Prepare for the Coming Change

There are several things you can do to prepare for these upcoming changes. Here are a few we have listed for you:

Accept Digital wallets

Digital wallets have become the No.1 payment method for e-commerce in Europe, as recent data shows. Digital wallets accounted for 26% of all online e-commerce payments in 2020. The dominance of wallets will continue, making up 30% of e-commerce payments by 2024. Using wallets helps you to save on costs you would otherwise have to pay in fees, making them an important payment method you should offer.

While the interchange fees on card payments are going up, Visa is reducing interchange fees on digital wallets – another compelling reason to start accepting e-wallet payments now.

Use A2A Payments and other Real-time Payments

Account 2 Account payments are instant payments that happen in real-time. They use open banking rails, hence are faster. Open banking infrastructure is maturing in Europe, and A2A payments could even surpass cards as a preferred payment method. By 2023, over 20% of e-commerce payments in Europe will use A2A payments, as per the Worldpay Global Payments Report.

iDEAL in The Netherlands is an example of a well-established A2A payments scheme. It currently processes over two-thirds of all Dutch e-commerce payments. A2A payments are a great alternative for retailers because of their lower costs and faster settlements. Consumers are also becoming aware of the convenience of A2A payments. According to a recent survey, more than half (54%) of UK consumers are willing to pay A2A via open banking if given that choice.

Request to Pay schemes in Europe, such as PayUK’s Request To Pay in the UK and SEPA Request To Pay (SRTP) in the EU, are newer, emerging real-time payment methods you could explore.

Speak To Your PSP

Speak to your payment service provider (PSP) on the best payment choices for your business. They can help you navigate the interchange fee changes and counsel you on the payment methods that you should use based on your business needs and location.

While completely avoiding card payments is not a viable option, you have to look at alternate ways to accept payments in order to reduce costs. How the impending rise in interchange fees affects the merchant ecosystem in Europe remains to be seen. But, as open banking matures and fintech innovation in Europe ramps up, the future suggests that real-time digital payments are here to stay.

How Can Novalnet Help?

As a global PSP, many of Europe’s leading brands trust us with their payments. We can guide you on how to make your payments more efficient. We help you accept payments globally in 125+ currencies in 150+ automated country-specific payment methods. Set up your payments within minutes with minimal coding using our instant payment plug-ins. With our AI-based risk management solutions and advanced analytics, you can design the best payment experiences for your customers, all in a fully secure environment.

Reach out to us to know more about payment automation and how to use it to grow your business.

Jose Augustine

Jose Augustine is the Chief Business Development Officer at Novalnet with extensive experience in European payment industry and a knowledge powerhouse.