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Cost of card payment for customers and merchants

Cards are one of the most popular payment methods amongst customers. Card payments are processed faster, and the customers have a quicker purchasing experience. However, there are costs for making a card transaction, and in this article, we will see what those costs are and whom it is impacting. 

Card payments involve multiple parties, mainly the customer paying with the card, the merchant accepting the card payment, the banks of both the customer and the merchant who process the payments in the back and the card issuing companies (Visa or Mastercard). 

Once the customer provides the card details and submits the order to buy, the information is passed through the Payment Gateway, the Payment Processor and the Card company before reaching the merchant's bank. The bank verifies the payment and responds with an approval or refusal back to the parties, and based on the response, and the payment may be settled within 3 business days. 

1. Are you paying anything for card transactions?

As a customer and holder of a debit or a credit card, you may pay some fees for holding and using your card. As a debit cardholder, you may pay a small monthly fee to your bank for your card, and the fees vary from bank to bank. You may also need to pay overdraft fees if your bank allows you an overdraft. You may also pay currency conversion fees for credit and debit cards if you buy in another currency. In these cases, the bank usually informs you of the fees before making a payment. Under general European law, your bank cannot charge you an increased rate for making card payments across the EU/EEA and all charges must be equivalent to domestic charges. But as a customer, you do not pay anything for your online card transaction. Your bank or card companies cannot charge you any extra fee or surcharge because you are using a particular card. It applies to all card transactions and payments made within an EU state and other Member states.

Note that American Express and Diners Club credit and debit cards and business or corporate credit cards where your company is invoiced instead of you are not protected by EU payment service standards, and you may be charged a fee for using these cards.

2. Who is paying the most in card transactions?

The merchants bear the brunt of the cost when customers use cards to make their purchases. When you make an online card transaction, merchants pay a fee called the Merchant Service Charge (MSC), which is composed of 3 main fees:

  • Interchange fees that are paid to the customer's bank
  • Acquirer fee that is paid to the merchant bank and
  • Network fees that go to the card company 

Various factors impact the MSC, such as the card type, brand, location etc. These charges can add up and can be expensive for small businesses. As a result, the Interchange Fee Regulation (IFR) was introduced to curb the negative effects of the high charges. IFR capped the Interchange fees to 0.3% for credit cards and 0.2% for debit cards. While the IFR successfully capped the Interchange charges, the Regulation ignored the other two fees - The acquirer fee and Network fees - leading to an increase of the unregulated charges. The CMSPI found an estimated annual cost increasing over 400 Million EUR within two years of introducing IFR and added 1 Billion EUR more to merchants' annual costs since 2017. In 2021, Mastercard increased their acquiring fees, authorisation fee and a few other fees all across the EU and EEA, while they increased interchange fees on transactions between the UK and the EU following Brexit. The merchants who bear most of the costs are generally small gas stations, small retailers and e-merchants. The 2021 change added a further financial burden on merchants up to 96.6 Million EUR in annual costs. 

The IFR had a variety of results across the European Union. Some countries have definitely benefitted from the interchange fee cap, while others, not so much. In general, the smaller businesses will face the brunt end of the subsequent increases of the unregulated fees. The CMSPI recommends bringing all card fees under the IFR. Even though the card fee increase will not influence customers directly at the moment, market competition will eventually dwindle as smaller businesses go out of business, and customers will be left with few devices or choices to make card payments. 

Last update: 10/02/2022

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