Mastercard Acquiring Volume Fee – A Cost for Every Card Type
The first key increase is to Mastercard’s Acquiring Volume Fee. The charge applies to all Mastercard transactions but, as a percentage fee, is likely to do greatest damage to merchants with high average transaction values. The changes the network have announced vary depending on several factors, including card type (Mastercard Credit, Mastercard Debit or Maestro), and region (which of the 19 affected European countries the merchant is located in). The figure below gives a sample of the changes for the five worst-hit countries, some of which are seeing their fees more than double. Austria’s acquiring volume fee is coupled with an increase to their Market Development Fund, bringing their total estimated losses to €7.13 million. Overall, CMSPI estimates that this fee alone will cost European merchants a total of €62 million every year.
Figure 1: Mastercard Acquiring Volume Fee Changes
3DS1 Got More Expensive – Just in Time for SCA
For most European merchants, use of 3D Secure will be necessary to meet the requirements of Strong Customer Authentication from December 2020. 3DS is an online authentication protocol created by EMVCo, a consortium of global card networks that includes Visa and Mastercard. Mastercard has announced that the fee for using its original iteration, 3DS Version 1, will double to €0.04 per transaction across 40 European countries from January 2021. In France, it will triple to €0.06. We estimate that these changes will cost the major European economies over €25 million annually.
The greatest impact will be for those retailers with a large online presence – something the pandemic has given many retailers no choice but to have. This figure is likely to fall with increasing use of 3D Secure Version 2, meaning it is vital that merchants can support the latest 3DS technology by 2021. Many merchants, through no fault of their own, will be not be able to use 3DS2 by January due to a lack of issuer readiness and, even then, there remains a fee of 2 cents per transaction for its use. Furthermore, in France the 3DS2 fee is also increasing; it will range between €0.04 and €0.10 depending on the transaction in question.
A New Fee for The Sales You Don’t See
Unlike the other charges, Mastercard’s new Acquirer Authorisation Fee applies to all declined transactions. Combined with the previous fee, this places merchants in the crossfire between SCA, the card schemes and the Covid crisis. The process merchants face is as follows. As the pandemic forces retailers to shift volumes online, their approvals fall. Lack of issuer readiness for SCA makes this even worse: we estimate that SCA will generate around €33 billion in additional declined transactions. With this new authorisation fee, each of those declines for Mastercard transactions will cost the merchant 0.9 basis points. This adds an estimated €1.3 million onto the €8.8 million we forecast that the fee will cost merchants every year based on pre-SCA decline rates. The other effect of SCA will be to require merchants to use an authentication protocol such as 3DSecure – a second area where fees are rising. Even for those able to bypass 3D Secure by employing SCA exemption strategies, some acquirers are charging additional exemption fees.
Haven’t We Seen This Before?
This latest blow to merchants is just one of many that have followed the 2015 Interchange Fee Regulation (IFR) in Europe. The regulation acted to cap interchange fees, paid by a merchant via their acquirer to the cardholders’ issuing bank, on all consumer domestic and intra-EEA transactions.
Initially, the legislation – which capped interchange fees at 0.2% and 0.3% for debit and credit cards respectively – was expected to deliver an estimated €9.4bn of annual savings for merchants across the continent. Scheme fees, however, were not explicitly included. What followed was a series of increases to these fees, beginning with Mastercard’s acquirer authorization fee in April 2016 which has cost merchants an estimated €85.6 million every year since. This pattern was in no way limited to Mastercard; following Visa Inc’s acquisition of member-owned Visa Europe in 2016, the then-CEO suggested that such fee increases would be part of the network’s strategy going forward (see quote). Visa increased the ad valorem component of their fee in January 2017 at a cost to merchants of approximately €314 million, bringing the total estimated lost savings from the IFR to €400 million less than two years after its implementation.
However, these two years were relatively tame compared to what was to come. The period between 2015 and 2017 coincided with a two-year review into the IFR’s impact conducted by Ernst & Young at the request of the European commission. Following the resulting report, the European Commission concluded there was insufficient evidence to prompt additional legislation addressing scheme fees. Once this review window ended, the pace of fee increases increased dramatically. European merchants have seen 11 additional increases over just four years since 2017. Collectively, CMSPI estimates that these have cost merchants €1.1bn in lost savings from the IFR.
"... On the pricing side, we believe there is an opportunity to expand yields in Europe as we align the economic model with the value we bring and genuinely evaluate pricing from the perspective of a commercial enterprise rather than a member-owned association ..."
Charles Scharf, then-CEO of Visa (Nov 2016)
What Does the Future Hold for European Merchants?
We estimate that the 3 new fees alone will cost merchants across Europe almost €100 million annually – and we are nowhere near the end. Since the introduction of interchange regulation in the United States in 2011, the country has seen more than 30 scheme fee increases. These have collectively eroded more than 50% of the benefits that merchants should have received from lower interchange. Scheme fees in the US total nearly 30 basis points – double European levels. Scheme fees are also not the only available avenue for networks to reclaim merchants’ savings; the IFR left other areas such as commercial, inter-regional, and ‘card not present’ transactions unregulated, and other changes announced by Mastercard appear to be targeting interchange in just these areas. If the US experience is any indication of Europe’s future, it has never been more crucial for merchants to optimize their payments arrangements for the long-run.
What Can a Merchant Do?
It may seem as if a merchant can do little in the face of scheme fees that are passed through by their acquirers. However, due to the complex manner in which they are charged to acquirers, scheme fees are not – and can never be – a perfect pass-through. This presents an opportunity for acquirers to insert additional margin. Merchants need to identify which elements of these fees are being commercially applied in order to bring them into negotiations.
Furthermore, it is not only the cost of the fees that is increasing; they are also becoming more complex. Even acquirers are becoming unable to pass through all the various fees and are making huge mistakes in the process. These mistakes have translated into a rising number of mischarges that could go unnoticed in a merchant’s transaction data. As the costs and the complexity of scheme fees continue to spiral, the need for independent, data-driven analysis increases.