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Post IFR: Scheme fees on the rise

Hero scheme fee on the rise Hero scheme fee on the rise Placehoder

19 May 2020

In 2013, the European Commission proposed the current Interchange Fee Regulation (IFR) which was accepted in 2015 by the European Parliament and the Council, introducing multilateral interchange fees (MIFs) for card-based consumer transactions. The capping of interchange appears to have contributed to a shifted network fee balance over these years, showing significant increases in costs from card schemes (Visa/MasterCard).

With our transparent pricing model, Bambora assumes the responsibility to implement and pass on new and adjusted transaction fees accurately to our merchants.

Background: The Interchange Fee Regulation

The Interchange Fee Regulation (IFR) took effect on June 8, 2015 with purposes such as stimulating cross-border payments competition between EU member states and reducing the cost of acceptance for merchants (and indirectly consumers). A key element of the IFR was the imposition of capped interchange rates on consumer debit and credit cards processed and issued within the European Economic Area (EEA), which took effect on December 9 the same year. Since then, within the EEA, the interchange fee is capped at 0,2% of the transaction value for debit cards and 0,3% for credit cards. For inter-regional transactions (meaning cards issued in other regions, such as the U.S., transacting in Europe) and commercial cards, interchange fees could be as high as 2% of the transaction value.

Effective as of October 19, 2019, Visa and Mastercard also made commitments to reduce inter-regional consumer interchange fees which was made legally binding. This means that interchange fees for cards issued outside the EEA are also capped when transacting in the EEA. This new cap does not affect corporate cards. This has a positive impact with reduced costs particularly for merchants in the Travel & Entertainment (T&E) sector, such as airlines and hotels, that often process significant volumes of international cards.

The effects of IFR for merchants and end consumers

A main purpose of the regulation was to decrease payments costs for merchants. However, studies from Edgar, Dunn & Company (EDC), EY Copenhagen and Payments Europe have shown that only parts of the cost reductions were passed on to merchants. A reason for this is the steep increase in card scheme fees, as well as the fact that larger merchants on pass-through pricing models were directly given access to the lower interchange while smaller merchants (often preferring simplified Blended price models where the acquirer takes the risk of any scheme cost increases) were on contracts for fixed, pre-IFR based Merchant Service Charges (MSC) which may for some acquirers have taken time to adjust. Also, acquiring pricing involves other aspects than interchange and scheme fees, such as merchant risk, complexity of integration and other value-added services. Ensuring adherence to the regulation also incurred development costs for payment service providers.

The reductions were also expected to benefit the end consumer by delivering lower Merchant Service Charges (MSC) to merchants which would be passed on through lower prices to consumers. Whether this has been the case or not is hard to determine, although the EY study assumes there have indeed been cardholder benefits.

Many consumers have however also faced increased cost of ownership for regulated credit and debit cards post-IFR as issuers were forced to revise their cost structures and pricing policies as a result of the decrease in interchange fees. Specifically, consumers experienced increases in both annual fees and usage fees for their payment products.

Bambora’s response to IFR

Acquirers may have reacted differently to the new regulation and some may be more efficient than others at accurately passing on costs to merchants, which has become increasingly complex and requiring more resources than previously on the scheme fee side to ensure cost transparency. With regards to the interchange regulation, at Bambora we reviewed our customer portfolio and arranged for impacted customers with a Blended price model to renegotiate their agreement. Bambora implemented support for the new rates as soon as they were in effect in order to ensure accurate pass-through of costs to merchants. In this way, IC++ merchants would see reduced costs immediately.

Card schemes’ response to IFR

Scheme fees are unregulated fees charged by card schemes such as Visa, Mastercard, Diners and Union Pay. These fees cover a multitude of things such as scheme authorization fees, volume fees, marketing & innovation funds, cross-border fees, licensing fees, scheme fees for reports, AML (anti-money laundering services) and much more. For each card scheme the fees are different and vary independently of one another. Fees are set by the schemes themselves and are periodically reviewed throughout the year. Acquirers, such as Bambora, are then free to implement and pass these costs on to merchants to the best of our ability.

Since the IFR was implemented, card schemes have increased these fees substantially. The EY study previously referred to examines this development between 2015-2017. In 2017 we started to see significant increases to MasterCard’s transaction value based Cross-border fees in most European countries (up to +30 BPS/0,3% increase on interregional transactions) and new fixed Reported transaction fees (up to 0,11 EUR/transaction) being introduced varying by merchant country, both affecting mainly non-domestic transactions.

In April 2018, the CNP International Acquiring Fee (IAF) increased by +15 BPS (0,15%), with another +15 BPS in April 2019 and a final increase of +15 BPS in April 2020, the purpose being stated to align Visa’s European business with other regions, likely connecting to the acquisition of Visa Europe by Visa Inc. which happened in a similar timeframe as the IFR. Another example is when MasterCard in July 2018 introduced new Card Not Present fees in SEPA (Single Euro Payments Area) countries on mainly non-domestic transactions, as well as high-impact additional fees being applied to refund transactions (previously only to purchases), also significantly impacting cross-border transactions.

In September 2019, Visa introduced a new 3D Secure fee of 0,02 EUR/authentication request, matching MasterCard’s already existing Secure code fee of 0,022 EUR. Visa also introduced modified and increased Card-present and CNP (card-not-present) fees in January 2020 (previously known as Association fees and E-com fees). These continuous increases in scheme fees have resulted in increased costs for merchants and worked to counteract the intended cost reductions of the IFR.


Scheme fee timeline Scheme fee timeline Placehoder

The IFR has led to reduced costs of acceptance for most merchants in spite of the observed scheme fee trends, but acquiring innovation is also a key driver of more optimal transaction economics.

Bambora’s scheme fee model

Acquirers can under- or overcharge their customers in relation to what the acquirer is billed by the schemes. Under- or overcharging is dependent on how accurately the fees are implemented by the acquirer. This varies from provider to provider as in essence this can depend on accounting assumptions and cost recovery methods. If an acquirer undercharges merchants, they do not cover the incurred scheme costs unless higher acquiring fees/margins are applied, whereas an overcharge would mean there could be hidden margins in the scheme fee component instead.

Bambora has designed an advanced scheme fee model that is based on several hundred different individual fixed and variable fees, which is continuously updated with new scheme fee releases and publications. Bambora interprets, analyzes impact and implements the new or revised fees, mirroring the scheme’s fee logic as closely as possible. Merchants that are significantly impacted are informed of the new fee levels and IC++ merchants are supported with cost estimates. From the announced effective date, the fee is activated in Bambora’s system and hence passed through to merchants.

Due to the complexity of Bambora’s scheme fee model, we manage to neither under- nor overcharge merchants, as confirmed by an independent external audit (PSE Consulting). In order to determine what fees are assigned to each transaction, key components of the transaction are matched against Bambora’s fee application logic/terms for each fee, matching the applied scheme logic. Despite the complexity of scheme fees, we make sure that we always charge our merchants the correct amount for each transaction and that we can supply them with transparent reporting on a transaction level.

Bambora helps merchants optimize transaction costs

With our transparent scheme fee model, we help merchants optimize their transactions costs by for example applying the optimal routing setup for each merchant ID.

Bambora has also developed a unique Scheme fee Simulator that can be used on the transaction flows of both prospect and current merchants. The Simulator uses actual transaction data to do scenario modeling in our system in order to identify cost reduction possibilities, make acquirer comparisons and to enforce transparency. This way, we make sure that we deliver the lowest possible costs and the highest level of pricing visibility for our existing and prospect merchants.

To summarize, the IFR has led to reduced costs of acceptance for most merchants in spite of the observed scheme fee trends, but acquiring innovation is also a key driver of more optimal transaction economics. The Interchange Fee Regulation is up for review by the European Commission later this year. Bambora will be tracking this closely and keep our merchants informed of any relevant updates.

External Sources and related material:

“Interchange Fee Regulation (IFR) Impact Assessment Study Report”, Edgar, Dunn & Company (EDC), January 2020. Available at: https://edgardunn. com/2020/01/interchange-fee-regulation-impact-assessment-study-report/

“Study on the application of the Interchange Fee Regulation”, EY & Copenhagen Economics, March 2020. Available at: https://ec.europa.eu/ competition/publications/reports/kd0120161enn.pdf

“Position paper on the upcoming revision of the interchange fee regulation (IFR)”, April 2020. Payments Europe, Available at: https://www.paymentseurope.eu/wp-content/uploads/2020/04/Payments-Europe-Position-Paper-IFR.pdf