understanding e-commerce pricing: the pros and cons of ic++

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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.

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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


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Scope


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

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Unbundled rates: what does IC++ stand for?

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

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Interchange vs. “Merchant Discount Rate”


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

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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

4 Primary Factors Impacting Interchange Rates


* 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

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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.

4 Primary Factors Impacting Interchange Rates (cont.)


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What are Scheme fees?


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 volume2. 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)

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What is the premium?


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

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IC++: Illustrative Pricing Examples


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

+ +

+ +

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IC++ Illustrative Pricing Examples (cont’d)


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

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Pros 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

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The 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

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

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