There’s No Such Thing as European Payments: Six Steps for Merchants Going Local

At the Merchant Risk Council’s April conference in Barcelona, hundreds of merchants and industry partners gathered to tackle one of the most complex markets in payments: Europe. CMSPI’s Timo Pauget and Martha Southall were joined by Jérémie Fave, Payment and Fraud Expert at LVMH, to ask how multinational merchants are approaching the challenge.

Here are the six steps they agreed every merchant must consider to meet the needs of the illusive ‘European consumer’.

1. Understand Your Customer

As our title suggests, there is a common misconception that European payments can be addressed as a unified phenomenon. Initiatives such as the Single European Payments Area (SEPA), the European Payments Initiative (EPI), and even the 2015 Interchange Fee Regulation (IFR) share a common goal of harmonising standards and experiences – at least across the European Union (EU).

However, a game of “Guess the Market” quickly uncovers what multinational payments managers know all too well: that offering the same suite of payment methods from Spain to Poland could extract vastly different results. Not only could some customers be excluded from paying altogether, but differences in support for solutions such as 3D Secure or API quality could mean that user experiences diverge for the exact same payment method accessed in a different location. For multinational merchants, in-depth knowledge of domestic payment preferences and demographic trends are therefore crucial in meeting customers where they are.

2. Get to Know Your Reporting

Now you have chosen your payment methods, it’s time to understand the data you’ll access to assess their performance.

This step can be easier said than done, with many European merchants struggling to get streamlined access to their reporting in the first place and, even when they do, tackling a range of charging structures. Take Germany, where a merchant may expect ‘interchange ++’ pricing for card payments sent via the global card brands, an interbank fee and acquiring fee for the domestic card scheme, and a combination of negotiable fees for ‘SEPA-LV’ bank transfers – all payment options that are possible to initiate from a single card.

Even for transactions sent via the global card brands, many merchants are still charged ‘blended’ fees. One study by the UK’s Payment Systems Regulator found that 35% of large merchants had non-blended (or ‘standard’) pricing, compared to 5% of small and medium-sized merchants.¹ The IFR requires that merchants receive reporting that breaks out their interchange and scheme fees unless otherwise requested in writing.²

Unfortunately for European merchants, even the most granular reporting does not guarantee transparency. Inevitable differences in the way scheme fees, for example, are charged from one acquirer to the next can be significantly more important for a large merchant’s budget than their contracted acquiring fee.

3. Know Your Regulation

Most payments professionals know about interchange fee caps in Europe. They’re aware that consumer transactions within the European Economic Area (EEA) have a maximum interchange fee of 0.2% and 0.3% for debit and credit cards, respectively. That knowledge can comfort multinational merchants and prevent them from studying their European fees too closely.

But what about Ireland, where debit interchange fees are capped at 0.1%,³ rather than 0.2%? Or Germany, where fees for the domestic card scheme are required to be bilaterally negotiated between merchants and issuers? Even within the EU, the IFR is just one amongst a host of directives and regulations where National Competent Authorities are granted differing levels of control over implementation. These differences can affect not only compliance deadlines – as we saw with Strong Customer Authentication across the region⁴ – but optimisation opportunities that often go missed under a global lens.

4. Choose Your Partners

Once you’ve understood the customer experiences you want to achieve and the compliance steps required, it’s time to choose payments partners that can support both.

At both a European and national level, it’s not uncommon for a merchant to have multiple acquiring partners – the result of a fragmented evolution of financial systems that means not every provider can reach all domestic card schemes, payment methods, and ‘on-us’ opportunities.⁵ Even when they can, diverging Transaction Risk Analysis thresholds⁶ or domestic acquiring licenses, for example, can make one provider significantly more efficient for a given transaction than another.

In this environment, the perennial challenge of choosing between a full stack partner and building a complex web of providers lives on. The choice raises questions of redundancy, reconciliation, ease of contract management and, above all, optimisation options. In the figure below, for example, our merchant may be able to access a wide range of payment methods, but still has limited redundancy in the event of an outage with Acquirer 3. It is therefore crucial that merchants build a supply chain that serves their strategic goals, rather than the other way around.

5. Let’s Talk Taxes

Following the UK’s withdrawal from the European Union at the end of 2020, the global card networks reclassified certain transactions between the two as ‘intra-regional’, as opposed to ‘intra-EEA’.⁷ The distinction is crucial: while intra-regional transactions are governed by the IFR, inter-regional payments (those made with cards issued outside of the EEA) are not.

The change meant that interchange fees for Card Not Present transactions between the UK and EEA increased fivefold, from 0.2% and 0.3% to 1.15% and 1.5% for consumer debit and credit card payments, respectively.⁸ According to analysis by the UK’s Payment Systems Regulator, this increased UK merchants’ annual payments acceptance costs by between £150 and £200 million. For some merchants, this sharp cost increase was a rude awakening to the realities of cross-border payments costs. For others, payments have long been an element of any domiciliation decision, and understanding the minutia of the rules that govern a merchant’s location is a crucial part of any localisation strategy.

6. Find Your Optimisation Levers

So you’ve entered the European market. You’re offering the payment methods your customers expect to see in each country, you’re compliant with the labyrinth of national and European-level requirements, and you’ve partnered with providers that facilitate your long-term goals. Maybe you’ve also taken advantage of local processing opportunities and have established a MID setup that accounts for the intricacies of cost and approval rates between regions.

But managing European payments is far from set-it-and-forget-it. In May, July, and August, you may be affected by the host of upcoming fee changes,⁹ and it will be crucial to understand whether the rates charged match those communicated by your acquirer. At the same time, PCI-DSS requirements are shifting,¹⁰ M&A is affecting long-standing payment types such as iDeal,¹¹ and European regulators are shaking up use of Near-Field Communication technology in smartphones.¹² In this environment, access to – and actionable influence over – their payments data must be first priority for merchants making the most of the European opportunity.