What are interchange and scheme fees?
Interchange and scheme fees are paid by businesses to accept every card transaction. When a consumer uses a card to make a purchase, both fees are levied on the merchant’s acquiring bank that processes the transaction and are subsequently passed through to the merchant. While interchange fees are paid to the card issuer and scheme fees are paid to the card scheme, both have their level set by the card scheme.
Below, we have summarized the key changes Australian merchants saw to their fees over June and July. A mix of increases and decreases, the changes could have implications for both businesses’ costs and their broader digital acceptance strategies.
Source: JPMorgan Resource Center
How should merchants respond?
1 | Review your digital wallet acceptance strategy.
Consumers increasingly prefer to checkout with digital wallet solutions, which have grown to take up 30% of all in-store card transactions - more than 4 times their market share in 20191.
Many tap-and-go digital wallets store tokenised, card-on-file credentials. Visa’s interchange fee for these transactions previously sat at 0.2% but has now changed to a $0.09 flat fee. Merchants can expect varying impacts depending on their unique transaction profile. For example, with all transactions below $45 seeing a price increase, the change could be especially relevant for low-ticket value merchants such as quick service restaurants, who may utilize tap-and-go digital wallets to reduce friction for customers at the checkout.
Although scheme tokenisation solutions are currently limited to the global schemes in Australia, the ability for merchants to route to different schemes on mobile wallet transactions is expected to be available by 20242 and the local scheme, eftpos, is also set to launch its own online tokenisation services by March 20243.
2 | Stay vigilant about acceptance costs and potential mischarges.
In today's highly competitive and rapidly-evolving payments landscape, merchants face the challenge of navigating complex pass-through fees at the transactional level. Monitoring pass-through fees can be a daunting task, as various payment schemes, intermediaries, and financial institutions are involved, each with their own fee structures and pricing models. In one instance, CMSPI observed an Australian merchant overcharged by $1 million in one year. To effectively manage and optimise their payment processing costs, merchants therefore require access to comprehensive data and industry benchmarks.
This is especially important for the most recent fee changes as they contain the potential for both cost increases and decreases. With retailers already under pressure in Australia4, merchants need to ensure that inaccurate pass-through does not stand in the way of possible savings.
3 | Re-examine your routing strategy in the face of evolving acceptance fees
Least Cost Routing (LCR) refers to the process of directing a transaction to the most cost-effective payment scheme. Because different payment schemes can have varying fee structures, merchants can optimise their payment acceptance costs by strategically selecting the appropriate route for every transaction. As rates change, however, so does the optimal routing strategy for each individual merchant.
Australian merchants were already at a critical juncture, with online routing being available since January 2023 and mobile wallet routing coming in 20245. Adapting to these changing regulatory circumstances is now crucial for Australian merchants to maintain their competitive edge and drive sustainable growth in an increasingly dynamic payments environment.
But routing goes beyond a simple, binary decision. Merchants need to evaluate the volume, card type, and fees associated with each transaction to achieve the most optimal, sustainable routing model. This analysis can help merchants make informed decisions about their routing strategies, potentially reducing interchange costs and improving overall profitability.
Given these changes to standard rates, even merchants with strategic merchant rates should take note of the updates and reevaluate the value of strategic partnerships. It could well be that these changes mean an alternative routing approach is more valuable than their current set-up.
The Path Forward
The recent changes in Australian interchange fees highlight the significant challenges merchants have in keeping their acceptance costs under control. But with access to granular transactional data and relevant industry benchmarks, merchants can gain valuable insights into fee patterns, identify potential inefficiencies, and pinpoint opportunities for cost savings. Armed with this critical information, merchants can avoid potential overcharges or incorrect fee calculations and negotiate more favourable terms with their payments partners, maximising profitability and staying competitive in an increasingly complex payment ecosystem.
3 RBA’s Issues Paper on The Australian Debit Card Market: Default Settings and Tokenisation