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November 10th 2020

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

U.S. retailers have evolved and adapted incredibly quickly to the unique challenges presented in 2020, but their payments arrangements haven’t always kept up. In this two-part series, we discuss four ways that the pandemic has impacted payments in the apparel/fashion sector. In this first blog, we have selected three (of the many) factors that impact the overall cost of acceptance: channel, routing arrangements, 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%.

1 | Online vs In-Store Costs

For U.S. merchants who are all too familiar with rising card fees, the shift online will offer no relief. In fact, average interchange fees on debit card transactions increase by 38% in the online space, despite the 2011 Durbin Amendment capping interchange fees on most such transactions (at 0.05% of the transaction value plus 21 cents). The discrepancy arises because the regulation only applies to banks whose assets exceed $10 billion, covering only around 65% of all US debit transactions. Credit card interchange fees were excluded completely from the Durbin regulation, and so the fees applied to these transactions rise from 1.65% to 1.86% on average when made online.

In addition, network fees – charged by card networks such as Visa and Mastercard – are higher for many CNP transactions. Since the Durbin amendment, U.S. merchants have been hit by more than 30 network fee changes – such as those we expect next year – which have added billions in additional fees. These charges are complex and opaque, but most elements of network fees are commercially applied and, with the right expertise and insight, merchants can achieve substantial reductions.

Taken together, these differences mean that an average U.S. merchant processing $1 billion of transaction value would lose $2.1 million of their revenue if these payments were made online.

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

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

2 | The Growth of Alternative Payment Methods

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.

Furthermore, as Buy Now Pay Later options such as Klarna grow in popularity in the U.S., we see suppliers offering short-term incentives to merchants to encourage their acceptance and build critical mass. These often come in the form of an initial period of discounted fees, after which the rates can increase substantially and consumers are more likely to demand the service.

"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

3 | Refunds

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.

Visa, Mastercard, and Discover claim that interchange fees (paid by the merchant to the issuing bank via their acquiring bank) will be reimbursed in full on refunds. However, as this refund is passed through the acquirer, it is not guaranteed that the merchant will ever see it. Ensuring that a refund actually reaches the merchant often entails extensive analysis of their transaction data. For large retailers, the interchange fee generally 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.

4 | Routing Arrangements

The covid-19 environment has threatened apparel retailers not just through online volumes, but also through the rising popularity of a form of payment seen as more safe from a sanitary perspective: contactless. Since the 2011 Durbin Amendment, which required that two competing networks be badged on every debit card issued, merchants have been able to route their debit transactions via the cheapest available network. CMSPI’s work with U.S. retailers has shown that navigating this complex process to optimize their routing arrangements can save merchants millions of dollars annually.

This routing can be achieved through either PIN or PINless authentication. Whilst PIN has historically been more prevalent in-store, PINless enablement is required to process transactions online. However, it is reported that a merchant is unlikely to be able to use PINless more than 50% of the time, even when they have the appropriate technology. This can be the result of supplier capability, but is also down to the many issuers who are not enabling PINless functionality when issuing cards. With many consumers viewing contact payments as a channel of transmission, the intricate routing arrangements and incentives that merchants have negotiated with the networks are placed at risk.

Had 2020 been a normal trading year, following expected growth trends, and had PINless been widely available, US merchants would have saved an estimated $2.1 billion through CNP routing. However, 2020 is not a normal year – coupling the lack of PINless enablement with soaring ecommerce volumes will lead these same merchants to lose out on an estimated $3.1 billion.