By Hiroki Takeuchi on Tuesday 16 February 2021
Rising fees from Mastercard and Visa could mean businesses ditching card payments, argues Gocardless CEO Hiroki Takeuchi.
On 1 January 2021 we finally said ‘Adieu’ to the EU and braced ourselves for the new rules that would govern trade between the Common Market and the UK. Many European regulations no longer apply to the UK, including the EU’s cap on credit and debit card interchange fees. Mastercard was first off the mark in announcing a hike in its interchange fees from 0.3 per cent to 1.5 per cent for EU businesses collecting online payments made on UK-issued cards - a move that will add to the cost of doing business with the UK, and may ultimately raise prices for consumers.
Businesses are already struggling due to Covid-19, not to mention the additional red tape and customs charges for exporting goods to the UK. The increase in card fees will feel like another blow. Could the growing maturity of alternative payment methods create a perfect storm that will start to push businesses to ditch card payments?
There are three reasons why I believe cards will price themselves out of the market.
1. Cards are expensive to begin with - and this fee hike makes them even more so
Even before Mastercard's announcement, card payments were expensive. A key reason for this is the sheer number of parties involved in every card transaction, from the card issuer through to the acquiring bank. As with any value chain, each player needs to make a profit or at least cover their costs, making the service more expensive to the end user - in this case, the merchant.
Another expense often overlooked by merchants is the extra time and money spent recovering failed transactions, to which cards are more prone. A recent report by Forrester found that the average B2B business spends 16-20 per cent of the payment value to recover a failed payment. What's more, 45 per cent say that payment failures turn into bad debt.
Combine both of these factors with the new rise in interchange fees, and you arrive at a very expensive payment option that is becoming harder to justify for many businesses.
2. Covid-19 has brought businesses to their knees
The rise in interchange fees couldn't have come at a worse time for merchants. 2020 was a difficult year for everyone and many of these challenges have continued into 2021. The pandemic has already forced many businesses to close or operate at a significantly reduced capacity for long periods of time. With little to no incoming revenue and overhead costs still outgoing, margins have been squeezed or eliminated altogether.
This fee hike adds more pressure, with merchants being forced to choose between absorbing these additional costs or passing them on to the consumer. Either option has the potential to threaten business survival.
Companies are now taking advantage of this pause in trading to reassess their business model, which includes their payment strategy. When faced with the rise in fees and the need to protect their business and loyal customers, it may not be long before merchants start to consider alternatives to cards.
3. Better payment methods are on the rise
Fortunately, new and alternative payment methods are maturing and rapidly gaining in popularity - mounting a credible challenge to what used to be considered, for many, the only game in town.
For example, bank-to-bank payment methods such as direct debit involve fewer parties in each transaction. This reduces the costs that accumulate through the value chain. They also are less prone to failures, reducing the time and money spent chasing payments.
Open banking technology is also maturing, which will significantly improve the speed and convenience of payments for merchants and consumers. According to the OBIE, 294 regulated providers were in the ecosystem as of December 2020, of which 102 have live offerings in the market. Additionally, over four million open banking payments were made in 2020, up from 320,000 in 2018. We believe that these numbers will continue to rise throughout this year and beyond, providing merchants and customers with a quick, secure and easy way to pay - all at a much lower cost.
For businesses, the interchange fee hike could be the critical factor that pushes them away from relying on cards and towards these alternative payment methods that are more suited for the present day. The Mastercard announcement may have been the death knell for cards - and for many, that will be a good thing.
Hiroki Takeuchi is the CEO of Gocardless. The views and opinions expressed are not necessarily those of AltFi.