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February 03rd 2023

Complex, Costly and Creative: Three Ways Merchants Lose Out to Card Network Fees

Last year, North American retailers lost an estimated $12.5bn to network fees, while European merchants’ annual costs increased by €1.46bn in the 6 years following regulation in 2015.

For many businesses across the world, network fees are just a jumble of often-unintelligible words that clutter every payments invoice. But those pesky line items are now one of the biggest challenges merchants face; in North America alone, retailers sunk an estimated $12.5bn into network fees last year.¹

And they’re not alone: network fees are estimated to have increased European merchants’ annual costs by €1.46 billion in the 6 years following regulation in 2015.² A global problem requires a global solution – but despite the rising costs, three hurdles remain in merchants’ ways.

1 – Complexity

Network fees are just one component of the Merchant Service Charge businesses pay to accept every card payment, alongside acquiring and interchange fees. Each transaction attracts multiple network fees, producing hundreds of combinations of dozens of individual line items that are charged to merchants by their processor and then passed on to the card network. For merchants trying to untangle this mess – even just to ensure their invoices are correct – well-known roadblocks arise:

  • Each processor charges differently – Network fees are typically deemed ‘pass-through’ costs, meaning they reflect the underlying rate charged to a processor by the networks for handling a transaction. But unlike interchange fees, those underlying rates are generally not publicly-available. To pass network charges onto merchants, processors around the world translate fees charged at different time intervals, in different currencies, across different channels, into a single, per-item and/or ad valorem rate. No wonder they do it differently, and – short of asking their competitors what they pay for each transaction – it can be impossible for merchants to tell whether their invoice is ever truly ‘pass-through’.

  • The fees are changing – Between 2011 and 2019, fee changes from the global networks are estimated to have increased U.S. merchants annual costs by $3.5 billion (Figure 1). Two further sets of hikes in 2021 and 2022 increased this by $1.17 billion³ according to our analysis. These changes can become even more pressing in the digital environment; in Europe, the introduction of Strong Customer Authentication brought with it multiple new fees tied to merchants’ strategies and consumer behavior⁴ online, making it extremely complex for providers to charge accurately due to inefficient communication between parties. Globally, each change flows into merchant invoices with varying levels of warning, making it hard to identify the culprit for a growing bottom line.

  • Mistakes happen – Amidst all this complexity, and with processors applying fees across billions of transactions every day, it’s no surprise that CMSPI regularly finds errors in the invoices it audits, many of which have been leaving millions on the table for some time.

Figure 1. Estimated annual impact of global network fee increases in the U.S. over time

Source: CMSPI Estimates and Analysis

2 - Continental Divides

A U.S. merchant can expect differing network fees based on acceptance channel, authentication method, card type and more. In Europe, the classifications compound again, split by intra-regional, intra-EEA, and domestic rates, where demarcations differ by network and the reclassification of one country can increase merchant costs by millions. It is in these spaces between a merchant’s geographies that inefficiencies grow, with limited settlement currencies leading some processors to charge significant amounts to hedge against fluctuations (Figure 2). And between network rules affecting a merchant’s ability to have their transactions classified as domestic – and therefore often cheaper – and sector-specific classifications, some businesses have had to develop whole new governance structures and domiciliation strategies to avoid mounting costs.⁵

Figure 2. The importance of cross-border accuracy

The difference between CMSPI and a sample acquirer’s FX rates applied over time.

3 – Competition

While regulators have stepped in to cap the interchange component of the MSC globally, network fees have often been left to run wild, leaving merchants to harness market forces on their own. But while merchants all over the world have utilized tools like co-brands and strategic rates to lower network fee burdens, none have done so like U.S. merchants, where network incentives are one of the first steps in a payments acceptance strategy. Since the 2011 Durbin Amendment, which guaranteed merchants the right to choose between at least two competing networks on their single-message PIN debit transactions, competition has been the name of the game. And now, with the Fed’s recent clarification, the opportunity has expanded into the Card Not Present space. The evidence suggests that this free market solution has placed downward pressure not only on network fees, but on interchange too⁶, which typically has its levels set by the networks.

The U.S. mantra of if one network doesn’t serve you, choose another is making waves around the world. But while some countries are recognizing the value of their domestic card networks in driving down costs – like Australia, where the RBA has set expectations for the industry to enable Least Cost Routing to the domestic Eftpos network – others are seeing increasing instances of so-called ‘mono-badging’ deals that cut out domestic rails. The world’s local card networks have proven integral in driving down costs often considered non-negotiable – from France’s Cartes Bancaires, to Canada’s Interac, to Singapore’s NETS – but the responsibility to claim those savings still lies with the merchant, and bespoke requirements for domestic scheme access and the need for intricate incentive packages often turn them away.

The Answer to the Network Fee Problem

U.S. regulators led the world in creating an environment in which merchants with the right expertise could answer the network fee problem. Others are starting to pay attention too, from Australia to the UK, where network fees are currently under investigation. But while merchants sit and wait for regulation, the costs only mount. For those taking fees into their own hands now, two steps form the backbone of their next move:


Know Your Position

Unravelling the complexity of global network fees can be daunting, but no merchant can leverage their position without understanding it – transaction-level network fee data ensures that, at least in the short-term, merchants aren’t falling victim to misapplied rates and ‘pass-through’ practices that leave them worse off than their competitors.


Where competition lies, use it

Merchants hand billions over to networks in the pursuit of giving customers the payment options they need. With dozens of networks globally vying for that volume, the strongest merchants are building complex, dynamic incentive strategies that harness every BIN to ensure they choose the right one.