Q: What more can the industry do as a whole to combat increasing scheme fees, in your eyes?
A: Largely owing to the significant market power that Visa and Mastercard hold, scheme fees have been on the increase for years: the industry ought to respond by regulating fees and fostering competition.
Although some effort has been made to ease pressure off merchants through the Interchange Fee Regulation (IFR) of June 2015, several aspects of the regulation were suboptimal – one of the most obvious areas being a lack of regulation for scheme fees. This has led to a significant erosion of savings intended with the implementation of IFR, and scheme fees could be brought within scope of the IFR caps in order to address the issue.
Alternatively, a move to foster competition could also be fruitful. Within the payments supply chain, the schemes represent the least competitive entities, with Visa and Mastercard dominating globally. There is a lack of competitive pressure keeping Visa and Mastercard in check and therefore the introduction of a significant competitor should help to ensure innovation and efficiency in the market, particularly with the decline of cash. Whether this is through Payment Initiation Service Providers (PISPs) and open banking or whether it is through the introduction of a card equivalent Single European Payment Area (SEPA), healthy competition will go a long way towards easing the burden of payment acceptance for merchants.
Q: Should I be thinking about WeChat Pay and Alipay as a European merchant?
A: Thinking about? Absolutely. Implementing? It depends. The hugely popular Chinese payment methods may currently be more suited to European merchants with high volumes of Chinese outbound tourist spend, but both Tencent and Ant Financial – parent companies of WeChat Pay and Alipay, respectively – have shown initial signs of targeting local consumers in Europe.
Alipay and WeChat Pay operate through mobile QR codes, with a number of integration options ranging from a printed merchant QR code that customers scan with their phones to a QR code reader built into the merchants’ point of sale that scans customer mobiles. The majority of consumers in China have both payment methods installed on their mobiles, meaning that merchants can credibly threaten to stop accepting one without the risk of losing significant sales: meaning there is a distinct competitive dynamic between the two, in contrast to Visa and Mastercard. Because of this, fees for WeChat Pay and Alipay are significantly lower than typical card fees in Asia Pacific.
With both payment methods now opening up their services to customers with non-Chinese bank accounts, and Alipay introducing ‘Mini Programmes’ to capture customers before flying to China, the permeation of the European payments landscape seems to be accelerating – and merchants need to be ready to understand the impact that could have.
Q: How do we encourage/incentivise our customers to use the payment methods that are cheaper for us as merchants?
A: New and innovative payment methods are entering the market almost daily, and for merchants it can be difficult to identify which are the most likely to disrupt the status quo. While many new payment types come at a premium price, there are a number of solutions that can actually reduce merchants’ costs if implemented correctly. In particular, Payment Initiation Service Providers (PISPs) – as defined in the Second Payment Services Directive (PSD2) – look set to provide merchants with tangible benefits, utilising existing bank account to bank account payment systems to reduce costs by cutting out the card schemes and merchant acquirers.
Given the ban on surcharging that was also introduced as part of PSD2, discouraging consumers from using more expensive payment methods has become a more difficult task. Fortunately, the legislation still allows for merchants to steer consumers towards certain payment methods, meaning that it is possible to incentivise customers with ‘points’ from rewards programmes, for example. If merchants want to benefit from lower payments acceptance costs and other benefits, then they must help to make those options consumers’ number one choice at the point of sale.
Q: Where do you see the future of domestic card schemes? Are the domestic schemes a solution to compete with the global schemes of Visa and Mastercard?
A: Domestic card schemes generally offer more competitive rates when compared to the global schemes and we typically find Visa and Mastercard struggling to dominate markets where domestic card schemes exist. That being said, in the interest of interoperability, cards issued by domestic schemes are often co-badged with international schemes for use abroad. This is particularly important for European merchants who see significant cross border sales, as a transaction using – for example – a German-issued girocard in Spain would need to be routed through the co-badged global scheme. In this respect, merchants that see substantial cross-border volume still rely heavily on global schemes.
As far as the future of domestic card schemes is concerned, a European equivalent of the US PIN Debit networks may perhaps not be too far off. The US PIN Debit networks operate in a similar fashion to domestic card networks except that there is a level of interoperability across networks. The Durbin Amendment introduced in 2010 mandated every card to be badged with at least two networks (schemes), allowing merchants to route transactions through the most cost-effective network available – resulting in significant savings. Given that the EU is looking to build on the Single European Payment Area (SEPA) by replicating it for cards, the introduction of a European wide network connecting domestic schemes with co-badging requirements could provide the European payments market with a much needed ‘shake-up’: finally addressing the dominance of the global card schemes.