The recent card scheme cross border acquiring (CBA) concessions have created a new model for cross-border acquiring. By default they have become the European Commission’s ‘Plan A’ as a result of the delayed cards regulation sign-off.
Merchants have once again outmanoeuvred banks and have won major benefits from the interchange caps and the significant changes in the terms of the card business. Since June 2013 the regulations have been debated, amended by the EU committees and voted by the EC parliament and final approval may be achieved at best by the end of 2014.
The new rules (which currently apply to Visa only) now enable cross-border acquirers with regulated operations outside a country to bid to domestic merchants using the 0.2% and 0.3% interchange, greatly undercutting current merchant service charges (MSCs). High credit card interchange countries such as the UK, Portugal and Sweden are very vulnerable and are most threatened by major reductions in interchange revenues. In these countries, domestic-only acquirers have no defence against CBA competitors. Their merchants could be offered reductions of up to 50 basis points for credit.
Acquirer defence strategies
To offer the new rates and build a domestic ‘defend strategy’, these players must have an acquiring business outside their home market. A few international acquirers already have the required licensed operations in several countries and are able to out-position domestic-only players. Locally-focused acquirers are rushing to set up operations cross-border, apply for payments institution (PI) licences, become locally regulated and passported. Once an offshore licensed entity is in place, defensive strategies can be built after careful reading of the new card scheme CBA mandates.
So, very significant change to the EU acquiring business model. The EU is facing an upheaval in the payments market over the next twelve months, and there is little action that players can take to avoid the CBA disruption.
One option, to reduce the tension, is help from the issuer community. Initially it was thought that most national market international card scheme issuers might voluntarily reduce interchange to the 0.2%-0.3% rates to avoid market disruption. So far, this is happening slowly. Regulators in Hungary have imposed the new interchange and rates in Poland dropped to 0.5% from 1st July 2014 onwards while Germany has recently reduced credit to 0.4%. Issuers in most other countries have held firm in the belief that over the next two years perhaps only 20% of transactions will be hit, and that smaller merchants will be unable to work to Interchange ++ billing.
What about merchants? For the very largest, annual savings of up to €50 million may be achieved. Many are already approaching their acquirers in anticipation of significant reductions from January 2015. The total benefits to the merchant community are huge.
The largest international acquirers as first movers are most likely to win market share, thus any increased acquirer margins will be short-lived. New, less experienced acquirers have potential to disrupt the traditional acquiring commercial model and make highly competitive bids, leveraging the much lower CBA credit card interchange rates and potentially creating a price war. Less able banks and new entrant acquirers may find themselves increasingly exposed as prices spiral downwards in a new intensely competitive acquiring environment. Inevitably, there will be losers who fail to balance their portfolios, enter high-risk sectors and who get hit by major write-offs.
The EC director general of competition may be delighted that this default ‘Plan A’ has bridged the gap until full cards regulation is in place, but is it aware of the potentially damaging impact the new accelerated CBA model may have on the acquirer players?
Peter Jones, managing director,
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