How UK retailers can tackle card fees as inflation soars
Leading payments advisors CMSPI take a look at one of the only cost items with a built-in inflationary mechanism – card payment fees – and what UK merchants can do to protect their bottom lines.
In May 2022, UK CPI inflation hit 9.1% - a 40-year high amidst Bank of England warnings that the UK’s economic outlook has “deteriorated materially.” But as businesses clamour to compete for customers with tightened purse strings, data from the BRC and NielsonIQ shows shop price inflation only just hitting 3.1%. In this article, we look at one of the only cost items with a built-in inflationary mechanism – card payment fees – and what merchants can do to protect their bottom lines.
Inflation and Card Fees: The Missing Link
Merchants across the globe typically pay a fee – known as the Merchant Service Charge – to accept every card payment. Its three components – interchange, scheme fees, and the acquirer fee – are often charged on a combination of per-item and percentage bases. It’s those percentage elements which automatically rise in line with the price of goods, and which have frustrated merchant advocates around the globe.
The built-in increases mean that a merchant whose prices are forced up as costs rise (even if they take a significant cut to their margin) will automatically see more funds flowing to the payments supply chain via their percentage fees (see Figure 1). Whilst the global card brands report profit margins that can sit above 50% , UK retailers are expected to see margins of just 3.2% by 2025 – partly the result of a pandemic-induced swing towards online shopping where competitors are just a click away. In fact, pure online retailers are already reported to see profit margins of less than 1/3 of the industry average across Europe. This reality means that, if a merchant’s payments partners are doing the same job they did previously and percentage fees are growing, then the need to audit fees is more important than ever.
Figure 1. How percentage fees can rise with inflation (illustrative example). As underlying costs grow, merchants may increase prices whilst absorbing a portion by reducing their margins, but percentage-based card fees can continue to rise proportionately with the transaction value.
Rising Card Fees in the UK
Even without inflation, card fees have been a long-standing battle for UK retailers. Since interchange fees were regulated in 2015 , CMSPI estimates that UK merchants have seen increases to scheme fees that now amount to over £500 million in additional annual costs. And that’s not all; in October 2021 and April 2022, the UK saw many of its transactions with EU-issued cards reclassified by the global card schemes as ‘inter-regional’ (as opposed to intra-EEA). This brought them outside of existing regulation, and saw many online transactions faced with fivefold increases to interchange fees, along with additional scheme fees and the removal of returned fees on many refunded transactions. These changes are estimated to add another £51 million in annual costs for businesses - on top of the £500 million figure.
The hikes have been so significant that the UK’s Payment Systems Regulator has begun conducting investigations into both scheme fees and cross-border interchange. However, in the current environment, retailers simply cannot afford to wait for regulation to materialize before getting their own house in order.
UK retailers are now shouldering more than half a billion in estimated fee increases since regulation. Given that payments can be a business’ second-largest cost after labour, merchants, regulators, and consumers can’t afford to look away from the payments market when inflation hits.
– Callum Godwin, Chief Economist, CMSPI
Costs Beyond Fees: Inflation and Lost Sales
Not only can growing prices inflate card fees, but Average Transaction Values can also be a predictor of falsely-declined transactions. As fixed rulesets designed to prevent fraud are more likely to reject higher-value payments, rising prices can put the experience of loyal customers on the line, too. In the world’s third-largest ecommerce market , these errors can be make-or-break for retailers - especially as ‘false declines’ are already estimated to be 5x more prevalent online than in-store. CMSPI estimates that fewer than than 50% of customers will retry a transaction following a false decline - a reality which makes it crucial that approval rates and fraud are not left out of the equation by businesses seeking to relieve pressure from their card fees.
Value is Being Left on The Table
As supply chain disruption and reports of a looming recession mount , UK merchants are looking to take payments into their own hands. However, many still believe that ‘pass-through’ fees such as interchange and scheme fees are non-negotiable, and that there’s little they can do about falsely declined transactions. But that’s not the case; in CMSPI’s experience, significant variation in acquirer pass-through of fees – arising from system capabilities, FX fluctuations, regular mischarges, and more – can produce unmissable opportunities for merchants with the expertise to audit effectively. More than that, the payments-savvy are working directly with every party in their transaction flow to ensure their fraud rules aren’t turning away good customers at a time when every lost sale could put a lifelong customer on the line. Card fees may be a long-standing frustration, but inflation makes them one that can’t be left to spiral for UK merchants in 2022.
CMSPI is an independent, data-powered, global consultancy that advises clients on improving the productivity of their payment arrangements by reducing costs, increasing sales and implementing innovative solutions.
To find out more about CMSPI and the services they provide to the retail industry, click here.
This article was also published in The Retailer, our quarterly online magazine providing thought-leading insights from BRC experts and Associate Members.