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22 July 2022
It’s a global trend that has persisted uninterrupted for years: the volume of cashless payments is growing in retail. According to a Germany-wide study by EHI, 78.7% of consumers paid cash in retail stores (in relation to total sales) in 1994. By 2019 this share had already decreased to 46.5%, and in 2021 only 38.5%(!) of consumers paid cash. This proportion is even lower in other countries.
Along with the proportion of electronic payments, retail companies are also incurring higher costs for these payment types. Optimising these costs is thus becoming a significant strategic issue for companies. Before you can optimise, though, you first need a clear understanding: how are these costs incurred? What do they consist of? And what adjustments can be made? This article answers these important questions.
Each cashless payment requires the services of a whole array of different market players: it starts with the till system manufacturers and the payment terminal providers, then the card issuers, the card systems (schemes), the payment service providers (PSPs) and the acquirers, and ends with the banks that hold the accounts from which the respective payment is debited (also called the issuing bank).
While till system manufacturers and payment terminal providers sell or lease the necessary infrastructure, card issuers, card systems, payment service providers and acquirers charge a fee for each completed payment.
The total fee that has to be paid generally consists of the interchange fee (IC), the scheme fee (SF) and the acquirer’s margin (AM).
The IC is paid by the acquiring bank to the issuing bank. The acquiring bank passes this fee on directly to the retailer, however. In contrast to the other fees, in Europe the interchange fee is strictly regulated – and usually amounts to between 0.2% and 1.5% of the transaction total.
The exact amount of the interchange fee is determined by the card systems. The latest exact fees are often published on their websites – at least in the case of Visa and Mastercard:
The amount of the interchange fee also depends on whether the card is physically present for the transaction (“card present”) or not (“card not present”), whether a credit or debit card is used to pay and whether the payment is intra-regional or even international. Generally speaking, the higher the risk, the higher the fee.
SF (actually card scheme fees) are the system fees charged by the card system for use of the network.
In contrast to the interchange fee, the scheme fee is not regulated – and can fluctuate widely depending on the provider.
The AM (also called acquirer’s mark-up) is the extra charge the acquiring bank puts on each transaction for acquiring, authorising and processing card transactions.
Like the scheme fee, the acquirer’s margin is not currently regulated – and can vary widely from acquirer to acquirer.
There are various models for calculating these fees. The most common models are Fixed Rate, Blended Rate, Interchange+ (IC+), and Interchange++ (IC++).
Fixed Rate is the simplest fee model: here the fees are charged as a fixed amount per transaction, e.g., € 0,20 per transaction.
There is no visible correlation with the interchange rate, scheme fee or acquirer’s margin.
Blended Rate defines a fixed percentage of the transaction volume. In this instance for example, a retail company pays 2.5% of the transaction volume per transaction. The percentage is usually defined by the acquirer for the retailer according to its respective industry.
Besides less transparency, charging using Fixed Rate or Blended Rate has the disadvantage of potentially higher costs: if an exact calculation of the individual fee elements results in lower interchange fees, for example, retail companies do not benefit from this in these cases.
With the Interchange++ model, the incurred costs are broken down into the separate interchange fee, scheme fee and acquirer’s margin and added together to get a final price.
The difference compared to Fixed Rate or Blended Rate is the greater transparency. Retail companies can always see the exact composition of the incurred fees. The acquirer’s margin can be calculated in turn as Fixed Rate or Blended Rate.
The Interchange+ model differs from Interchange++ to the extent that no differentiation is made between the scheme fee and acquirer’s margin.
The interchange fee is shown separately, while the scheme fee and acquirer’s margin are combined as a single “plus”. This combination of scheme fee and acquirer’s margin can in turn be based on Fixed Rate or Blended Rate.
This model thus offers less transparency than Interchange++, so the breakdown is slightly simpler.
Fee models have a direct impact on the costs incurred for cashless payments. Additionally, the Interchange++ model, for example, can improve understanding of cost composition and the development of individual components.
It is important to know the different models in any case, so that you can make an informed choice of the best model for your own requirements. The «Swiss EFT Insights» study, which treibauf conducted in 2021 with Arkwright, revealed that almost 39%(!) of those asked did not know which fee model was used in their company.
Please note that this study primarily involved small and medium-sized businesses in Switzerland. Nonetheless, this figure shows the enormous potential for the professionalisation and optimisation of EFT costs.
Which cards are customers using most frequently? Which cardless payment systems are being used – and how often? In other words: what is the exact composition of cashless payments (also referred to as the payment mix)?
If you can answer these questions, then you also know the significance of difference cards or cardless payment systems for your sales. In turn, this knowledge is essential when it comes to choosing the right payment service provider or acquirer, as well as for price negotiations and subsequent selection of the fee model.
The easiest way to gain these insights is to use payment-analysis software, such as the Matchbox payment analytics centre. The software automatically analyses sales, matching rates and the composition of transactions and converts the flood of payment data into meaningful diagrams, enabling companies to make well-founded decisions.
Do you know how your scheme fees and acquirer’s margins are calculated? Or where you sit with your fees in an industry comparison? Do you know the impact of total turnover on the fees per payment?
We can only provide a partial answer too, unfortunately. When it comes to how fees are incurred and calculated, there is still a lack of transparency in the EFT market. To change this, treibauf initiated its own series of studies last year.
The «Swiss EFT Insights 2021» study has already yielded some interesting insights. In 2022 we are continuing and expanding the series of studies with ZHAW (Zurich University of Applied Sciences) under a different name.
Dominique is the CEO of treibauf AG and an expert in all the strategic challenges facing the EFT market. She is also able to draw on many years of experience as an analyst and strategist. She reports here regularly about the most significant trends and developments for the industry.
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