The Retailer Summer Edition 2022

THE RE TA I L ER

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HOW UK RETAILERS CAN TACKLE CARD FEES AS INFLATION SOARS

Martha Southall Senior Economist CMSPI

L eading 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 pay ment 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 exam ple). 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 proportionatelywith 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 trans actions 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 sawmany online transactions facedwith 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 towait for regulation to materialize before getting their own house in order.