How High Interchange Fees Sparked a Payment Revolution
Think back to early 2022, to the time when there was quite a spat between two of the world’s largest corporate entities, and let’s recap on what led to this falling out.
In November 2021, Amazon announced that it would stop accepting Visa credit cards for purchases on their UK site and for Prime subscription payments from January 19, 2022. Amazon cited the “high fees Visa charges for processing credit card transactions” as their reason for this remarkable decision. Thankfully for millions of Amazon and Visa customers, the company postponed its plan at the last minute, much to the relief of its Visa credit card-holding customers in the UK.
The potential inconvenience caused by this decision and the possible exodus of these customers was averted. An agreement was reached; however, neither company would divulge the terms on which the resolution was achieved. In their own statement at the time, Visa confirmed the decision, saying, “Amazon customers can continue to use Visa cards on Amazon.co.uk after January 19, while we work closely together to reach an agreement.”
What Was the Cause of the Dispute?
The official line from both parties was that cost was the primary factor. There may have been other underlying reasons, but according to the initial statement issued by Amazon, the high cost of credit card payments led this retail behemoth to impose this restriction on its UK customers.
What Are the Costs of Which They Speak?
The costs can be complex, but essentially Visa and Mastercard, along with other card networks, charge a fee to merchants for every transaction they undertake with their customers when they pay with a credit or debit card.
According to groups representing retailers in the UK, this cost of accepting card payments has increased significantly. One group, The British Retail Consortium, said back in 2021 that the cost of accepting card payments had almost doubled in the previous two years. They compared the average cost per card transaction with cash payments and concluded that a cash purchase on average would cost a retailer 1.42p. A typical debit card transaction would cost 5.88p, while a credit card transaction would cost them 18.4p.
Some said the issue of card payment fees had been exacerbated by Brexit. In 2015, the EU enforced a cap on what’s known as “interchange fees,” fees charged to acquiring banks and in turn the merchants by the card schemes for accepting payments through their networks.
However, since the UK took the decision to leave the EU, the cap no longer applies to customers in the UK carrying out transactions with retailers in the EU, leaving the UK open to increased costs imposed by the card schemes.
The fee cap limited the interchange to 0.2% of the transaction value for debit cards and 0.3% for credit cards. However, from October 2021, Visa increased the fee for card-not-present (online) transactions to 1.15% and 1.5% respectively. With Amazon being one of the biggest online retailers on the planet, one can see what impact this increase could have and may have been the catalyst for the souring of the relationship between these two giants. In fact, an Amazon spokesperson said the dispute was related to “pretty egregious” price rises from Visa over a number of years with no additional value to its service.
Amazon’s stance, previously reported by Bloomberg News, prompted the UK Trade Commission to call on the government to improve the UK-EU trade agreement with analysts calling on British regulators to look into the fees in the credit card market. “If Amazon can’t make it work, with all their resources and ability to navigate legislation to avoid costs, then small businesses have no chance and so the government must improve the UK-EU trade and cooperation agreement to keep British businesses competitive,” said Tamara Cincik from the UK Trade and Business Commission.
What Are the Implications?
This considerable spat shone a light on the costs to merchants of taking payments through the major networks and may have signaled their search for viable alternatives in an effort to reduce costs. But what are the alternatives?
The payments ecosystem in the UK has seen a gradual increase in awareness of and shift towards alternative payment systems and services. The PSR (Payment Systems Regulator) in the UK previously set out its strategic summary for the following five years, promoting choice and competition within payments.
The payment method considered to have the biggest potential to provide greater choice and competition is Open Banking Payments. Building on the existing account-to-account Faster Payments facility, which has been in place since 2008, Open Banking Payments allow consumers to make payments to retailers directly from their bank account without the need for card scheme involvement. The PSR is firmly behind the promotion of Open Banking Payments, making it an integral part of their strategic plan.
This additional choice of payment type offered to consumers has become increasingly popular in the UK. In their statement marking the fourth anniversary of PSD2 regulations across the EU, the Open Banking Implementation Entity (OBIE) stated that from December 2020, one million new users have taken up the offer of initiating an OB payment every six months, and at the end of 2021, 26.6 million OB payments had been made – an increase of over 500% in just 12 months.
Customer growth is clear, and the offering of Open Banking payments is becoming a more viable and attractive payment option for both consumers and merchants, bringing it more into the mainstream. This growth will clearly continue, with the potential for more merchants to offer Open Banking payments as part of their checkout process, facilitated by more third-party payment providers entering the market.
Will this increased level of choice over time reduce the use of payment cards? Will the huge retailers such as Amazon begin to offer Open Banking payments as a way for consumers to make purchases, and will that competition in turn increase bargaining power for them and other large retailers and reduce payment costs for merchants overall? None of us will be privy to the negotiations, but it will be interesting to see what unfolds over the coming months and years.
What About Chargebacks?
Nothing will take the place of card payments, not for the foreseeable future anyway, but with regulators and industry bodies encouraging choice and competition, particularly in the UK and Germany, the steady increase in the use of these alternative payment methods, such as Open Banking payments, may affect chargeback volumes. Let’s look at how the dispute landscape may be affected.
As we know, the chargeback schemes run by the payment networks offer certain protection for consumers paying with their debit or credit card. Each network has its own set of rules and regulations that must be met for a dispute to be raised, but what if the payment networks were no longer part of the equation? Without network involvement, the opportunity for merchants to offer their customers an alternative payment method that could reduce their costs but also offer their customers more choice in the way they’d like to pay would seem an attractive proposition. However, could the perceived lack of consumer protection be off-putting for customers?
When it comes to the security of the transaction, Open Banking payments are inherently just as secure or indeed in some scenarios more secure than card payments. When a customer confirms a purchase and selects the Open Banking Payment option at checkout, they are taken to their own bank’s app to authenticate the transaction, usually using biometrics. The bank verifies that the customer is the owner of the phone or computer they are using to make the purchase using fingerprint recognition or face ID.
Biometric authentication is one of the strongest methods of verifying a transaction, so the threat of fraud claims should reduce as well as the possibility of “friendly fraud” or first-party misuse as it’s otherwise known. If a consumer attempts to claim that a genuine Open Banking payment is unauthorized or fraudulent, the fact that the transaction has been authenticated in this way ought to protect the merchant from such spurious claims.
What about non-fraud type disputes, where the consumer is claiming, for example, that they did not receive the goods purchased or the goods weren’t as described? Where does the consumer and indeed the merchant stand in this situation where there is no card network chargeback process and ultimate arbitration to follow? This is where the direct relationship between the merchant and the Open Banking payment provider comes into play.
With card payments, the card issuer has no direct relationship with the merchant, which is where the card scheme fills that void. However, the Open Banking payment provider has a direct and contractual relationship with the merchant. Many of the false consumer claims, whether unintentional or intentional, stem from the consumer seeing the route to resolving their dispute as being much easier if they bypass the merchant completely and contact their bank in the first instance, thus removing the opportunity for the merchant to put things right.
However, once the bank has facilitated the payment, their involvement in that transaction ends. This means the consumer will need to contact the merchant directly to try to resolve the dispute, giving them the opportunity not always afforded to them if the purchase had been made with a traditional payment card.
The Open Banking payment provider will also have an involvement in the dispute process and have an interest in ensuring the matter is resolved amicably for both parties. This could therefore benefit merchants in being able to resolve disputes themselves, together with their Open Banking payment provider, without the need to deal with chargebacks, thus reducing their chargeback ratios overall.
Paving the Way for Alternative Payment Methods
The disagreement between Amazon and Visa certainly brought to light the longstanding issue between payment schemes and merchants of transaction fees. This may also have opened the door, or at least left it slightly ajar, for other payment methods to step further into the marketplace and make a convincing case as a cost-effective and viable alternative to traditional payment methods for both consumers and merchants.