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December 12th 2017

Your Merchant Service Charge (MSC) is changing – here’s why

Interchange. A single word with 3 syllables that so easily strikes fear into the heart of the merchant community. Over the years, interchange has been an uphill struggle for many merchants – battling weak regulation and inconsistent charging structures – and even today, despite regulation, here at CMSPI we still spend lots of our time working on interchange optimisation projects for our clients.


Many merchants are still charged on less transparent charging structures lacking visibility of their fee breakdowns, in some cases acquirers are still failing to pass on savings, and without benchmarking data and negotiating power merchants are still being overcharged for many services.

The rise of the scheme fees

Since Interchange Fee Regulation (IFR) was introduced in the European Union over two years ago, CMSPI has witnessed an interesting trend taking place in the split of merchant’s MSC fees. Historically, before the IFR was introduced, interchange typically comprised of approximately 85% of the MSC split, but CMSPI estimates this will decrease to 63% following Visa’s upcoming scheme fee increases from April 2018 (Fig.1, Fig. 2 and Fig. 3 below).

Out of the remaining components of the MSC, scheme fees and acquirer margin, the margin has remained fairly consistent (5% pre-IFR and an estimated 7% post-April 2018), revealing the reason many European merchants will see an increase in their MSC: scheme fees are on the rise. Pre-IFR, scheme fees made up only 10% of the total MSC in comparison to our CMSPI estimates for April 2018, where that figure has tripled to 30%.

Visa Inc. publicly stated their intention to re-align scheme fees for Europe with their costlier counterparts in the Rest of the World after the 2015 Visa Europe acquisition. These fee structures target cross-border transactions which are typically harder to regulate, with premiums that can exceed 1% of the transaction value. It would seem the rise of scheme fees hasn’t yet finished, and merchants need to be vigilant to mitigate these increases.

What factors influence my MSC breakdown?

It is important to note that the figures above are averages and in practice, a merchant’s MSC composition varies according to a number of factors. A merchant’s interchange bill, broken out into over 100 possible line item charges, can depend on a wide variety of factors including: regulated vs unregulated debit, card type breakdown, capture method, channel, region of cardholder, merchant industry and size, to name a few. Thoroughly understanding your payments profile means you will be in a much stronger position to implement changes that have a real effect on your bottom-line.

Scheme fees are equally as complex and a variety of factors including: card type, card brand, region and average transaction value, will affect the underlying costs behind a merchant’s scheme fee charges. Scheme fees are a negotiable part of the MSC breakdown and merchants are at risk of being overcharged by their acquirers, who may attempt to over-charge merchants above and beyond the proposed scheme fee increases. We assist many of our clients with ongoing monthly invoice audits, removing the need for extensive internal resource and keeping our clients up to date with any discrepancies in their charges.

The same message holds true for acquirer margin fees. Factors including: merchant size and industry, average transaction value, charging structure, refund levels, risk and supplier relationships, can drastically change how much margin merchant’s pay. Understanding how your unique business profile determines your acquirer margin fees will put merchants looking to negotiate their contracts in a much stronger position.

The international landscape

Many merchants today are operating in multiple countries across international borders. This brings an added level of complexity as typically, MSC compositions also differ significantly between countries. Multilateral Interchange Fees (MIFs) are very high in regions including the U.S. and Latin America, but are low in countries where interchange regulation has already taken place – Europe, Australia and China, for example. Countries where local debit schemes are prominent often have very low/zero interchange, low cost-recovery scheme fees and higher acquirer margins.

Perhaps one of the most extreme examples of this is in Denmark with Dankort. A typical Danish merchant can expect to see 0% interchange, 5% scheme fee and a 95% acquirer margin. This is in stark contrast to a merchant operating in the U.S. grocery store industry who will typically experience high interchange (89%), high scheme fees (10%), and low margins (1%).

So how can merchants mitigate these scheme fee increases?

Merchants need to optimise their interchange and acquirer margin fees as soon as possible, as well as stay up-to-date with all scheme fee increases to ensure they are being passed on fairly by acquirers. Historically, we have seen the schemes use increases as an opportunity to inflate the underlying scheme fee costs and over-charge merchants, and this can be difficult to spot for merchants of any size.

CMSPI has started a formal process to register our strong disapproval of these latest scheme fee increases from Visa, and we would strongly encourage all merchant advocates to support this. In the coming weeks we will be communicating with merchants to propose next steps and we welcome your support and feedback.