Understanding E-Commerce Pricing: The pros and cons of IC++
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This document discusses Interchange++ (IC++) pricing models for e-commerce transactions. It explains that IC++ separates interchange fees, scheme fees, and acquirer premiums for more transparency. While complex, IC++ pricing allows merchants to understand costs for different card types and transactions. The document provides examples of how IC++ fees vary and outlines both pros of transparency and cons of complexity versus blended rates. It concludes that merchants should evaluate their needs and discuss IC++ pricing with acquirers and payment providers.
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Understanding E-Commerce Pricing: The pros and cons of IC++
- 2. 2 Understanding E-Commerce Pricing: The pros and cons of IC++ Private & Confidential | Understanding E-Commerce Pricing: The pros and cons of IC++ The information, materials and opinions contained in this presentation are for general information purposes only, are not intended to constitute legal or other professional advice, and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. The information is intended for the recipient's use only and should not be cited, reproduced or distributed to any third party.
- 3. 3 IC++ Pricing: Why is this important? • As of June 9th 2016, all merchant agreements in the EEA should be offered with Interchange++ (IC++) pricing • Blended rates should only be offered if, as a merchant, you formally refuse an IC++ pricing • Navigating through fees imposed by the Card Networks can be challenging. This session aims to help you: 1. Evaluate and select the pricing model that best suits your needs 2. Better understand merchant agreements and make the right strategic decisions when expanding into new markets 3. Help create long-term value for your e-commerce business Private & Confidential | Understanding E-Commerce Pricing: The pros and cons of IC++
- 4. 4 Scope Private & Confidential | Understanding E-Commerce Pricing: The pros and cons of IC++ This presentation will focus on VISA and MasterCard specifically, as: • They are 4-party schemes (Cardholder, Merchant, Acquirer, Issuer) • They still represent ~90% of all e- commerce volume in Europe Please Note • Interchange and fees are an extremely complex topic. This presentation will therefore include a few simplifications • Whilst Visa and MasterCard have an overall similar approach to IC and fees, they have each their own specificities that we will not cover in detail today
- 5. 5 Unbundled rates: what does IC++ stand for? IC Private & Confidential | Understanding E-Commerce Pricing: The pros and cons of IC++ + + IC = Interchange: The commission the card issuer (traditionally, a bank) receives for each transaction made using the card Fees charged by Card Networks to the acquirer for their scheme management activities. As standard, these are passed on to the merchant Premium of your acquirer / PSP to cover its other costs of doing business and margin
- 6. 6 Interchange vs. “Merchant Discount Rate” Private & Confidential | Understanding E-Commerce Pricing: The pros and cons of IC++ Interchange: fee paid by a merchant's bank (acquirer) to a cardholder's bank (issuer) to compensate that issuer for the value and benefits the merchant receives when they accept electronic payments • Intended to distribute value across stakeholders throughout the value chain to promote electronic payments, security and convenience to benefit merchants, governments and consumers “Merchant Discount Rate”: typically a blended rate approach to all fees paid by merchants to accept card payments • It combines interchange, scheme fees and acquirer/PSP premium
- 7. 1. Type of card • Consumer vs. Commercial • Immediate/Deferred Debit, Credit, Prepaid, Charge, etc. • “Base”, Premium, Super Premium 2. Geography • Issuer country/Merchant country, categorised as: Domestic, European*, International 7 4 Primary Factors Impacting Interchange Rates Private & Confidential | Understanding E-Commerce Pricing: The pros and cons of IC++ * Visa and MasterCard have a number of sub-regions within Europe Interchange ranges from ~0.2% for Domestic Immediate Debit transactions in EEA, to ~2.25% for some International Commercial cards transactions
- 8. 4. Industry • Some countries have dedicated IC rates for certain specific industries/verticals (e.g. Charities, government entities, airlines, supermarkets, etc.) 3. Transaction type • Secured (3D Secure) vs. non-secure • E-commerce vs. contactless vs. PIN, etc. 8 4 Primary Factors Impacting Interchange Rates (cont.) Private & Confidential | Understanding E-Commerce Pricing: The pros and cons of IC++
- 9. 9 What are Scheme fees? Private & Confidential | Understanding E-Commerce Pricing: The pros and cons of IC++ Scheme Fees are charged by Card Networks for their scheme management activities to the acquirer, and as a standard are passed on to merchants They include three relevant fee types: 1. Fees linked to the overall transaction volume 2. Fees linked to the type of transaction (e.g. e-commerce, secured, recurring, MOTO, cross-border, etc.) 3. Other fees: country specific, currency premia, etc. Scheme fees can vary greatly based on the transaction scenario (examples shown later in the presentation)
- 10. 10 What is the premium? Private & Confidential | Understanding E-Commerce Pricing: The pros and cons of IC++ The premium constitutes the acquirer’s / PSP’s revenue and covers: • Dozens of fees that are not a part of Scheme fees, but are nonetheless charged by the Schemes to the acquirer • The acquirer’s / PSP’s other costs of doing business and margin In addition to the premium, transaction and chargeback fees are also quite common. Those cover: • Gateway costs and dispute management costs that your merchant account may be generating
- 11. 11 IC++: Illustrative Pricing Examples Private & Confidential | Understanding E-Commerce Pricing: The pros and cons of IC++ 1. UK merchant, UK Consumer Immediate Debit card, unsecured IC: 0.20% Scheme fees: ~ 4-15 bps Premium: % 2. UK merchant, Swiss Card, Consumer Immediate Debit card, unsecured IC: 1.20% Scheme fees: ~ 8-20 bps Premium: % Note: for MasterCard, using a generic industry and currency + + + +
- 12. 12 IC++ Illustrative Pricing Examples (cont’d) Private & Confidential | Understanding E-Commerce Pricing: The pros and cons of IC++ 3. International transaction, Standard Consumer card, unsecured IC: 1.60% Scheme fees: ~ 50-80+ bps Premium: %+ + 4. International transaction, Super Premium Consumer card, unsecured IC: 1.98% Scheme fees: ~ 50-80+ bps Premium: %+ + Note: for MasterCard, using a generic industry and currency
- 13. 13 Pros of IC++ Private & Confidential | Understanding E-Commerce Pricing: The pros and cons of IC++ Transparency: merchants know exactly who charges for what The merchant only pays what’s relevant for his type of transactions, with a constant premium Merchants are in a better position to negotiate when moving from one acquirer to another
- 14. 14 The Cons of IC++ Private & Confidential | Understanding E-Commerce Pricing: The pros and cons of IC++ ✗ The exact processing costs are unknown until you actually begin processing (and vary over time) ✗ Your acquirer is likely to transfer Scheme Fee changes on to you ✗ Overall more complex to track and reconcile
- 15. Conclusion Private & Confidential | E-Commerce Success: What do I need from my payment service provider? • IC++ pricing is a complex topic • There is no perfect formula – every business will have its own needs • Only work with a cost base you understand • Talk to your acquirer/service provider to understand what is included in its IC++ pricing framework, and how it could benefit you
- 16. 16Private & Confidential | Presentation title @checkout /checkout /company/checkout /checkoutpayments Info@checkout.com London HQ 32 Wigmore Street London W1U 2RP United Kingdom T/ +44 207 232 3888 Singapore 8 Eu Tong Sen Street The Central #13-81 Singapore 059817 T/ +65 622 11664 Dubai Shatha Tower Dubai Internet City United Arab Emirates T/ +971 55 418 4266 Mauritius Level 10, NextEracom Tower 1 CyberCity, Ebene, Mauritius T/ +230 467 1430 Get in touch
Editor's Notes
- Comments Requirement for unbundled pricing Aim is to create long-term value for your e-commerce business New markets considerations: some alternative payments are indeed a lot more competitive than all the fees associated with a cross border transaction Potentially introduce ongoing pricing changes?
- Comments 4 party schemes are the main targets of the Interchange Fee Regulation (IFR) While I am going to try to be as thorough as possible during this presentation, I am nonetheless forced to make a few simplifications if I don’t want the whole room to fall asleep Here at Checkout.com we have pricing experts therefore if you have specific questions, feel free to come to the stand and we will do our best to address these
- Comments IC = The commission that the issuer of the card gets, each time you pay with the card, in exchange for issuing the card to the cardholder 1st + = Scheme fees = Fees charged by Visa/MC to the acquirer and hence to the merchant for their scheme management activities [Note: as opposed to Processing activities which should be separated as per the regulation] 2nd + = Premium of your acquirer / service provider to cover his other processing and running costs I will give you a bit more background on each of these 3 across the next few slides
- Comments Interchange helps maximize the value delivered to all stakeholders (Visa/MC tag line) Potential joke on MC being more “transparent” than Visa? TBC Often when you read merchant agreements or discuss with a sales executive you end up hearing the terminology “Discount Rate” The discount rate is essentially a blended rate approach to fees, which combines interchange, scheme fees and acquirer/PSP premium. When you negotiate an IC++ pricing there is no such thing as “discount rate”
- Comments Deferred debit = essentially a credit card MC has many more categories of cards: Gold, Platinum, World/World Black edition, World Signia… Geography: usually merchant/ issuer country applies. However, for Visa: From 1 September 2016, for consumer card transactions at merchant outlets within the EEA, domestic interchange fees will no longer apply when the merchant and its acquirer are located in different EEA countries. Under these circumstances, for a Visa Europe transaction, regardless of the location of the issuer, intra Visa Europe EEA Multi-lateral Interchange Fees (MIFs) will apply by default Visa and MC have their own definition of the Europe region, which differs to an extent Visa regions: Domestic, Intra-EEA, Intra-Europe non-EEA, International MC regions: Domestic, Intra-EEA, Intra-Western, Intra-Eastern, Intra-European, International Industry: other examples: fuel and parkings in Switzerland, quite a few in Spain, etc. For EEA transactions, thanks to same people that have make IC++ compulsory IC rates are very simple: 0.2% for immediate debit and 0.3% for deferred debit and credit transactions as long as its a consumer card (corporate cards would vary, up to about 2%) As soon as you enter the realm of cross border, then the matrix becomes a lot more complex with fees that range from c. 0.5% for European transaction (typically EEA to non EEA) up to ~2.0% for an international transaction with a super premium card or a corporate card, and even higher for Purchasing cards for MC (2.25%) Obviously all this is pre-scheme fees….
- Comments Deferred debit = essentially a credit card MC has many more categories of cards: Gold, Platinum, World/World Black edition, World Signia… Geography: usually merchant/ issuer country applies. However, for Visa: From 1 September 2016, for consumer card transactions at merchant outlets within the EEA, domestic interchange fees will no longer apply when the merchant and its acquirer are located in different EEA countries. Under these circumstances, for a Visa Europe transaction, regardless of the location of the issuer, intra Visa Europe EEA Multi-lateral Interchange Fees (MIFs) will apply by default Visa and MC have their own definition of the Europe region, which differs to an extent Visa regions: Domestic, Intra-EEA, Intra-Europe non-EEA, International MC regions: Domestic, Intra-EEA, Intra-Western, Intra-Eastern, Intra-European, International Industry: other examples: fuel and parkings in Switzerland, quite a few in Spain, etc. For EEA transactions, thanks to same people that have make IC++ compulsory IC rates are very simple: 0.2% for immediate debit and 0.3% for deferred debit and credit transactions as long as its a consumer card (corporate cards would vary, up to about 2%) As soon as you enter the realm of cross border, then the matrix becomes a lot more complex with fees that range from c. 0.5% for European transaction (typically EEA to non EEA) up to ~2.0% for an international transaction with a super premium card or a corporate card, and even higher for Purchasing cards for MC (2.25%) Obviously all this is pre-scheme fees….
- Comments Fees linked to the overall transaction volume: those can depend on the region of the transaction (Domestic vs. European vs. International) Other fees/ misc: development/ innovation/ marketing funds from MC, currency surcharges for MC (if settled in a difference currency than the processing currency) Potentially mention fraud/ Chargebacks, although those are technically not part of the textbook definition of ”Scheme fees” Note that there are 100s of fees and many pertain to operating an acquirer (data usage, project fees, BIN fees, etc…) so its important to make sure that you are not charged for these. What are rebates? You might have heard about this but sadly it is something of the past for the most part. As VISA Europe is officially cancelling them from this Saturday October 1st. This said for full disclosure, rebates were a portion of the fees, which VISA was refunding to Acquirers every quarter (15 to 30% of all fees paid) based on overall volume/transactions processed
- Comments Potentially mention verbally reputation risk to justify the CB fee, however I would not spell it out on slide
- Comments Even within Europe, overall costs vary greatly depending on country or type of transaction
- Comments Note for GP: As we discussed in the past“Scheme fees” can be a bit inacurrate here. For Visa for example, the international acquiring / international ecom are not in what Visa calls ”Scheme” Refer to Dubai/ Singapore, and how local payments can make a lot of sense for international expansion in addition to cards ENETS pricing in SG: SGD 1.20 fixed for SGD transactions
- Comments Pros: Its transparent, you know exactly who charges you what. You only pay what’s relevant for your type of transaction => 1.5% in the UK today: you are getting ripped off You can better negotiate when you move from one acquire to another (assuming you understand the other fees especially FX and transaction) Cons: You won’t know your exact processing cost until you actually process, as it is linked to your card mix, so you cannot model/anticipate It makes it easier for your acquirer to push to you all the scheme fee changes It is sometimes difficult to fully understand all the constituent parts that drive your processing costs => Overall more complex to track and reconcile