Fashion Industry Focus (Part 2): The Spiraling Cost of Online Payments

10th November 2020
Toby McFarlane
Toby McFarlane

Retail has evolved incredibly quickly in 2020 and the payments industry has struggled to keep up. In this two-part series, we discuss four ways that the pandemic has impacted payments in the apparel/fashion sector.  In this second blog, we have selected two (of the many) factors that impact the overall cost of acceptance; channel and refunds. 

The pandemic has prompted many firsts for both customers and retailers. Many consumers were led to their first ever eCommerce purchase as a result of the lockdowns experienced across the globe, and in response many merchants (who might not have offered eCommerce shopping before) scrambled to set up or expand their online operations quickly to cope with the sudden change in spending habits. Figure 1 shows just how quickly this happened in the U.S., and Europe has seen similar trends. Using the 28th February 2020 as a baseline, average sales values in the face-to-face environment fell by 91% in April. In the same month, sales in the online space were up almost 70%.

Figure 2: The Evolution of Apparel Sales in 2020 – Channel, Source: CMSPI Estimates

1 | Online vs In-Store Costs

Despite interchange fee regulation covering all EU-issued consumer cards, there are cost implications for European merchants as well. Interchange Fee Regulation (IFR) in 2015 capped interchange fees for Card Present (CP) and Card Not Present (CNP) transactions, but CNP remains significantly more costly for merchants to accept. For example, when the European Commission took the positive action to secure commitments to lower interchange on inter-regional transactions (e.g. a U.S.-issued card being used in Germany) from Visa and Mastercard, CP inter-regional transactions had interchange reduced in-line with IFR rates of 0.2% for debit and 0.3% for credit. CMSPI estimates that interchange fees increased from an average of 0.24% to 0.28% in the online space.

In addition, scheme fees – charged by card schemes such as Visa and Mastercard – are around 0.1% on average for CP transactions, rising to 0.13% for online purchases. Moreover, there have been new, or amended, scheme fees brought in every year since the IFR – such as Mastercard’s new 3DS fee – which has added billions of euros in additional fees. These charges are complex and opaque, but, most elements of scheme fees are commercially applied, and with the right expertise and insight merchants can achieve substantial reductions.

The Growth of Alternative Payments

Online merchants will be aware that while card acceptance is demonstrably expensive, the majority of alternative payment methods for eCommerce – PayPal, Klarna, etc. – can see merchant fees of well above 3%: even though many are essentially card payments in disguise. For example, PayPal users generally load up their wallet using a card, and PayPal is charged card fees for this – which are then passed on to the merchant with PayPal’s margin added on top.

The shift to online for fashion merchants means they will suddenly see a drastic increase in their average cost per transaction. CMSPI is helping apparel merchants around the globe deliver full transparency of costs, holding their payments supply chain to account for their services, and delivering substantial cost reductions.

Alex Ellwood - Head of Merchant Advocacy


The nature of buying apparel means this shift also affects consumer behaviour in another way. Many people have likely experienced the difficulties of finding the right size online – with some resorting to buying the same item in multiple sizes with the intention of keeping only the one that fits. In fact, many fashion retailers have had to close fitting rooms as part of their safety measures, so relying on returns is often the only way to buy, even in the CP space.

Interchange fees (paid by the merchant to the issuing bank via their acquiring bank) are reimbursed in full on refunds by Visa, but Mastercard caps this reimbursement at €0.05 per transaction. For large retailers, the interchange fee often represents around 80% of the total Merchant Service Charge paid to accept each transaction. Whether the other elements of this fee are refunded depends on the contract a merchant has with their acquirer. These additional costs associated with refunds are likely to hit fashion retailers more significantly than those in other industries.

In Summary…

A trend towards online retail was visible prior to the Covid-19 pandemic, but the sudden closure of many stores across Europe forced this transformation to take place over just a few months. Merchants, along with consumer habits, have had to adjust at an unprecedented pace. This is especially so for fashion retailers, whose outlets were closed for months as part of measures to reduce transmission of Covid-19. These merchants also face a number of industry-specific challenges such as an increase in refunds.

These dramatic shifts have made optimising payments arrangements mission critical for merchants, otherwise they’re at risk of losing out on significant revenues and good customers. Further, with the difference in cost to process payments online, coupled with frequent new, or amended scheme fees, now is the time for apparel retailers to address their payments fees.

CMSPI’s work shows that a scientific approach, coupled with the right outreach to issuing banks, can maximise approvals and boost merchants’ revenue significantly. We have worked alongside our merchant partners in both the optimisation and regulatory spheres to ensure that retailers’ response to these complexities is one which reaps the full rewards of the ‘new normal’ – and demands a better one.

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Read Part 1 In Our Fashion Indusry Focus