The key regulatory changes confronting merchants

Merchants are facing a raft of regulatory changes in the current payments' environment - everything from Strong Customer Authentication (SCA) through to wider PSD2 changes, such as secure communications and open banking, which are focusing their attention.

However, following the pandemic there are a few things that you should be aware of, especially if your business has grown considerably in the past 18 to 24 months. In short, if your business has not had an acquirer review for some time, then you may find you are paying more than you need for the benefit of allowing your customers to pay by card for your goods and services.

What are the different types of fees?

There are two ways that merchants are charged for the acquirer services they benefit from: IC++ fees and Blended fees.

Blended Fee

The Blended Fee is typically used by smaller retailers which want to know exactly what their costs are going to be over a set period. This is a fixed fee that is in place for the contract period – usually three to five years – between the merchant and the acquirer, a method akin to a homebuyer taking out a fixed-rate mortgage. The major benefit is that because fees are fixed, there are no nasty shocks if fees within the transactions change during the contract period.

Fees can change because of fluctuations in LIBOR, for example, which will end on December 31, 2021 to be replaced by the Sterling Overnight Index Average (SONIA). If any contracts run past this date where acquirers still refer to LIBOR, it is also worth contacting your payment services provider to check what this means for you when LIBOR ceases to be used.

This is the kind of distraction that most smaller merchants do not want to be concerned with, which is why the Blended Fee option is more attractive. But there is a tipping point at around £50m of card turnover, when using the Blended Fee becomes less attractive to the merchant because the likelihood is they are paying over the odds for their payment processing services.

IC++ Fees

At this point, the IC++ Fees can become better value, as larger merchants can benefit from shaving down different parts of the fees as they are separated out in this charging method. IC++ stands for Interchange Scheme Fees+ Acquirer Fees which is a pricing model where the separate costs of processing credit card transactions are segregated into three disparate parts: the interchange fees (paid to the card issuer), the card scheme fees (Visa/Mastercard) and the acquirer processing fees.

Since these are separated, it is possible for the merchant to look at ways to maximise profits by targeting lower fees within the different parts of the overall IC++ costs. It takes time, effort, money and expertise, but when you are dealing with card transactions worth north of £50m a year, even a 0.1% benefit in fee charges could add £50,000 to your company’s bottom line. For most merchants, that would be a few extra staff on the shop floor, or perhaps an additional senior manager.

Card payments during the pandemic

Any company that has seen significant growth in the number of card payments it is processing over the past 18 months should revisit their contracts because they could be paying more than is necessary on the Blended Fee system.

Many acquirers will not revisit their client’s Blended Fee contract until they are asked to, because any beneficial changes to rates stay with the acquirer. With IC++, they are taken by the merchant. But the reverse is the same too if costs are rising rather than falling. So, as rates have gone down over 2019 (-30.06% from the start to the end of the year) and 2020 (-91% from the start to the end of the year) according to the one-month LIBOR rate charts, the benefit has stayed with the acquirer without being passed on to the merchant in the Blended Fee model.

For example, in February 2020, the one-month LIBOR rate was at 1.52% but by September it had fallen to 0.16%. That is a fall of 1.36 of a percentage point which on £50m would have added £680,000 to a business maximising this method through IC++ Fees.

Bear in mind though, in the five years prior to 2019, the one-month LIBOR rate rose each year, with the biggest increase of 150.73% in 2015. So, in these years, the Blended Fee would have been the better option for the merchant, and not for the acquirer.

Either way, if you have seen your card transactions rise considerably during the pandemic – a trend which is set to continue apace as we see more people using contactless payment methods such as smartphones and wearable tech such as watches to pay for goods and services – you should look at the terms of your contact, especially with LIBOR disappearing at the end of the year.