Kicking Us While We’re Down: Merchants Face New 3D-Secure Fees

Less than one month before merchants, acquirers and issuers must be compliant with Strong Customer Authentication (SCA) rules, Visa has introduced a significant new charge for all transactions sent via its primary tool for SCA-compliance: 3D-Secure. This further highlights the enormous market power that the card schemes hold over merchants, and emphasises the need for all merchants to continuously audit, assess and amend their payments arrangements.

Over the past few months, almost every participant in the payments supply chain has pulled together in the pursuit of a delay to SCA under the Payment Services Directive II (PSD2), and has celebrated some muted success following the EBA’s announcement of its support for delays in exceptional circumstances. The global card schemes – Visa and Mastercard – have been instrumental in this process, and continue to work closely with merchants, acquirers and issuers alike to ensure that SCA is rolled out as smoothly as possible.

The primary method of facilitating SCA for card transactions is likely to be via the EMVCo product 3D-Secure (3DS) and the card schemes have been working on an updated version of the tool: version 2 (3DS v2). This is a positive and necessary move in the journey towards SCA readiness, as 3DS v2 now captures over 100 data points about the transaction compared to the 6 data points captured by version 1 – allowing for more sophisticated fraud analysis. It is hoped that the newest version of 3DS v2, version 2.2, will also help merchants maximise conversion rates and reduce fraud in line with the objectives of PSD2, due to its ability to support exemptions to SCA such as Transaction Risk Analysis (TRA).

While many National Competent Authorities (NCAs) are working to agree a delay to the SCA deadline with industry players, some remain adamant that they are ready for the 14th September deadline – meaning that merchants must remain vigilant in their progress towards compliance in these markets.

Additionally, merchants cannot be sure of how any delays will be phased in. Timelines may differ for each issuing bank, compliance solution and sector, and will certainly differ from country to country.

Anything other than a harmonised European delay could actually cause more complexity and confusion for merchants and consumers than the current Europe-wide deadline.

This all sounded very positive, until Visa recently announced that they would be charging a new fixed fee per transaction for any sent via 3DS. The new fee comes as a slap in the face to merchants that had worked alongside Visa on SCA, and could cost over €30 million annually on top of the plethora of both previous and future scheme fee increases from the card schemes.

Multiple industry participants estimate that the proportion of Card Not Present (CNP) transactions requiring SCA will be roughly 50% following the SCA mandate, and 3DS will be used for the majority of them. This means that the new fee will be practically unavoidable for merchants operating online.

Regardless of the level of the fee, the structure is wholly inefficient. 3DS as a product will have cost the card schemes a sum to produce, but ongoing maintenance costs will likely be negligible. Merchants will pay the flat fee for every transaction sent via 3DS, and allow the schemes to recoup their costs of development up to a point. After the breakeven point, the card schemes will be making almost pure profit on subsequent transactions, with merchants bearing the costs once again.

The new fee has indirect effects across the wider payments ecosystem as well. If sending transactions via 3DS comes with an additional cost, then optimising exemptions to SCA – where 3DS can be avoided – becomes even more critical, and PSPs could charge an additional premium for this service. Potentially even more worrying is the fact that Visa now has an incentive to send as many transactions as possible via 3DS, maximising friction for merchants and likely resulting in reduced sales.

Further to this, Visa have announced significant increases to scheme fees across all card types from January 2020, with only certain MCCs exempt for the first 12 months. The fee, previously a single rate across the entire Visa Europe region, now varies by country and by channel, resulting in an estimated 70% increase in scheme fees for merchants in certain countries.

Both Visa and Mastercard have adjusted Card Not Present scheme fees recently as well, with Visa increasing the additional percentage fee for inter-regional transactions in April 2019 and again in 2020, while Mastercard have introduced new fees for inter-regional and intra-regional transactions.

Visa posted an operating margin of 66% last quarter[1], while Mastercard’s latest release saw them achieve an operating margin of 57%[2]. Interac, Canada’s debit network, is a non-profit organisation and charges a fraction of a cent per transaction on a cost recovery basis [3] – multiple times lower than even just the new 3DS fee. So what benefits are merchants seeing from Visa and Mastercard over and above what Interac provides in Canada and many other card schemes provide globally? It could be inferred that the card schemes leverage their market dominance to maintain significantly higher fees than would occur in a competitive market.

Recent Scheme Fee Increases

Visa

• New 3DS fee August 2019
• Increased scheme fees from January 2020
• Increased CNP inter-regional fee April 2019, April 2020

Mastercard

• New CNP inter-regional fee January 2019
• New CNP intra-regional fee January 2019

Ultimately, 3DS v2 is a necessary tool to navigate market regulation and allow card payments to work, and it has been commercialised like almost every other industry change before it. The European Commission, and regulators globally, must work to review and reform the card market either by:

• Introducing true competition between card schemes, such as via mandated co-badging, or;
• Introducing and promoting a true competitor that is not card-based, such as via PISPs and open banking.

Existing approaches have not been strong enough and have failed to grasp the underlying issues with the entire system.

Merchants must review their arrangements to ensure that fees are accurately charged now, as well as in the future. CMSPI empowers hundreds of the largest merchants globally with the ability to accurately benchmark and audit all aspects of their payments arrangements, allowing them to hold suppliers to account and ensure exceptional service at competitive prices.