Interchange fees: Time to end high costs and price-fixing?

By Sarah Caroline Bell

Interchange fees – or the Merchant Discount Rate (MDR) – have been long been critiqued for their high ongoing cost to business. Their complexity has also been called into question. The cost of processing a transaction is divided up across a variety of providers.

The acquiring bank, the issuing bank, the scheme, the type of cards, the merchant and sales details all factor into the end cost to business.

Payments have long been dominated by two providers, Visa and MasterCard. Dominating with similarly high-priced rates, opened them up to allegations that they were in fact price-fixing. In 2005, this culminated in merchant and trade associations filing a class action lawsuit against both Visa and MasterCard. A $6 billion dollar settlement was finally reached in 2014. Thankfully, the current environment may be putting an end to their vice-like control over processing even further.

At this year’s Merchant Payment Ecosystem (MPE) event in Berlin, the future, cost, and structure of interchange fees were called into question. The deputy chairman of Worldpay, Ron Kalifa said, “There is a clear strategic need for to look beyond payments and payment processing for new sources of revenue. Processing is a commodity service going forward. It is the sorts of things that you do alongside that drives value.”

As new players enter the payments processing environment, business owners will finally be able to exercise the power of choice and will be able to select a provider that meets both their needs and budget. It points to a future where interchange fees will have to be flexible in order to survive. Does this mean payments in the future will be lower in general, with the cost offset by combining processing with other value-adding fintech services? It appears to be the case.

Towards a new structure

On average, traditional transaction fees are approximately 2.5% of the total transaction processed. A longstanding critique of this has been the fee is a percentage rather than a flat rate; why should it vary by dollar value? Many firms are eyeing up the business potential that surrounds undercutting the traditional MDR fee structure. New fee structures range from offering a fixed low rate or by providing a zero-fee system that generates profit in other ways.

Across ASEAN, payments processing forms have started to become a great alternative for business simply because they save money and they are easy to use; there are no middlemen, there are no hidden fees.  In Singapore, Alipay is proving to be a popular provider, making traditional transactions both less costly and more flexible. We can look to the US for a prediction of what is to come in the areas of payment processing.

LevelUp, a zero interchange fees payments provider, is one of many innovators making waves in the industry. Their strategy is to lower fees as much as possible, and to continue to lower fees as the business grows. LevelUp bundles payments together; if a customer makes repeat purchases over a few days at one place, then only one fee is charged.

Another US launched provider, Paymently, has focused on providing wholesale rates to small businesses. It is a great way to boost the bottom line of small retailers and service providers alike, and would be hugely advantageous to business should it expand into Asia. The US has an abundance of alternative payments providers, it is clearly a lucrative growth industry. 99MerchantAccount is another processor provider combining processing with modern cost-effective functionality.

Processing fees are also lower, at a wholesale rate, and support a wide range of nearly all point of sale systems, EMV credit card terminals, online merchant services, wireless processing, mobile processing, and is fully PCI DSS compliant, or, Payment Card Industry Data Security Standard compliant. 99MerchantAccount provides online merchant services, perfectly meeting the needs of modern business.

Then there is Paypal. While known widely for its services to individuals, it is another payment processor that does not have MDR fees. The huge advantage of Paypal is its presence internationally; Paypal covers 200 countries and 26 currencies. The fact that Paypal is already present and functioning across ASEAN means it is in prime position to really disrupt the interchange fees industry.

Shopify is another provider currently functioning across ASEAN countries, providing Merchant Solutions to assist with payment processing. Shopify seems to have thought a bit deeper about what a business really needs and have put this into a package. As well as payments processing, they also provide shipping and cash advances, which is a winning combination for small businesses. It is this kind of structure that adds value for businesses; providing actual functionality into one easy to use platform while also minimizing cost.

What it means for ASEAN

Concern against the rate charged for interchange fees has been growing for some time, so much in fact that in some countries regulatory bodies have intervened in order to cap prices. If we look at the case of Australia, the Reserve Bank has this month intervened to regulate MDR fees. Providers have reported reduced profits, a problem only set to worsen.

Could the same apply to ASEAN? It’s possible. But regardless of whether regulators intervene or not, with the spreading of much more sophisticated technology it seems likely that MDR charges may have to be reexamined anyway simply to remain competitive. New players continue to enter the market and they are upstaging the traditional providers with better service at a better rate.

Will traditional processors be forced to offer more attractive packages to retain customers?

Will they also have to drop their rates to match or will they adapt and broaden the range of services they provide?

One way or the other, it indicates a future where businesses of all sizes will be able to keep more of their hard earned revenue. And that is a good future, indeed.