Scheme Fees: More Than a ‘Pass-Though’ Cost
Scheme fees, charged by card schemes such as Visa or Eftpos, are one of the three major components of the Merchant Service Charge paid to accept every card payment. In Australia, as elsewhere, they are changing constantly; April 2021 updates alone, for example, are estimated to cost Australian retailers up to $300 million annually (CMSPI estimates and analysis).
Scheme fees are typically treated as a ‘pass-through’ cost, but it’s very hard for merchants to calculate whether they’re passed through accurately due to their complexity. Even established acquirers are put in a tricky position when interpreting them. In fact, in a recent case we observed a 300% difference in the way one acquirer interpreted a scheme fee change compared to another, which is not uncommon, and highlights the importance of granular analysis and expertise.
Whilst the RBA’s latest Conclusions Paper demands greater transparency from the schemes in the setting of these fees, they are still yet to be regulated. It is therefore crucial that merchants are auditing their scheme fees at the transactional level. If not, they could be left paying significantly more than their competitors for the same ‘pass-through’ rate.
Interchange: Not a Settled Issue
Unlike scheme fees, interchange fees have been regulated in Australia. The country was the first to do so in 2003, sparking more than a decade of similar legislation globally to cap what is generally, for large merchants, the costliest element of the Merchant Service Charge. Australia’s regulation is complex, utilizing a combination of capped rates and weighted averages of 0.5% and 8 cents.
But there’s more to come for retailers. The RBA has now decided to introduce a separate weighted average based on whether a customer’s payment card is ‘badged’ with one or two schemes (or ‘networks’) for the processing of its transactions. The new regulation means Single Network Debit Cards will face their own interchange ‘sub-cap’ (at the same 8 cents level faced by other cards), preventing them from being more lucrative for banks to issue on average.
Why DNDCs? The Benefits of Routing
Merchants are hopeful that, with proper enforcement, the new measures will remove domestic SNDCs from the market. But why is this so important to them? Unlike SNDCs, Dual Network Debit Cards present a huge opportunity for Australian merchants. Although interchange fees are paid to card issuers, their level is set by the card schemes, who may enter strategic agreements with enterprise merchants. Ensuring merchants always have the option to route a transaction via one of two available schemes on a card gives them leverage in these negotiations, generating competitive tension that drives down cost.
However, optimizing interchange is not as simple as having two schemes on a card. Taking full advantage of Least Cost Routing requires technical collaboration with your acquiring partner, a data-driven negotiation strategy, and visibility over the strategic rates achieved by similar merchants. And as the RBA increases pressure to enable LCR online too, it becomes even more imperative that merchants act.
In the short-term, however, the RBA’s updates could mean revisions to interchange pricing and therefore to the rates merchants can expect to be charged. It is crucial that merchants monitor the pass-through of these upcoming changes. On average, CMSPI finds errors in 1 in every 2 merchant invoices audited, often resulting in 7-figure mischarges that become increasingly likely as acquiring banks upload new rates onto legacy systems.
The Acquirer Fee: Are You Getting What You Pay For?
When looking to tackle card fees, merchants often hear that scheme and interchange fees are ‘pass-through’ costs. But who decides how they’re passed through? This is up to the merchant’s acquiring bank, who are charged the fees and then apply them to the merchant on a per-transaction basis. The RBA themselves note that this process can generate opportunities for merchants’ payments partners to build additional margin into their rates:
"[T]he opacity of scheme fee arrangements may be limiting competitive tension between the card schemes, as well as between acquirers (by obscuring their margins)."
(RBA, Review of Retail Payments Regulation 2021)
These dynamics make the acquirer fee an unmissable piece of the cost puzzle for Australian merchants. But what are you getting for your acquirer fee, and how much of it is additional margin or accidental mischarges? To know this, merchants must equip themselves with the right data, expertise, and transparency over competitors’ rates to benchmark their true costs effectively.
The Solution for Merchants?
The RBA’s recent Conclusions Paper brings with it the news that crucial components of the MSC in Australia may be undergoing significant change in the coming months and years. It’s very challenging for merchants to interpret these fees, which often appear on their invoices as hundreds of individual rates, applied across billions of transactions on a daily basis.
It is this complexity that makes it crucial for merchants to optimize their payments regularly, comprehensively, and with the correct data. In the first instance, that means a transaction-level audit to ensure that all fees are being charged correctly. In the second, it means regularly assessing the business case for your current arrangements, comparing your strategic agreements directly with those of similar merchants, and ensuring that you are paying only what is generating direct value for your business.