Retailers look to pass interchange cost savings to customers

It appears that retailers are adopting a ‘wait and see’ approach to passing potential new-found savings from lower interchange rates to customers, as they quantify exactly what these savings amount to and whether they will be offset by load shedding and labour costs.

Interchange is a fee that one bank pays to another in a given transaction. The fixed portion of interchange (which also includes a variable rate charged as a percentage of the transaction) was recently restructured and significantly reduced by the South African Reserve Bank.

The new interchange rates are structured to incentivise more secure payments by both acquirers and issuers. In a card transaction, the acquiring bank (the one that owns the point-of-sale (POS) device used by a merchant) pays interchange to the issuing bank (the cardholder’s bank).

According to chair of the interchange project at the Payments Association of South Africa, Willie van Zyl, most acquirers use an ‘interchange plus x’ model to determine the fees they then charge merchants for providing a point-of-sale service.

Since interchange has come down dramatically, merchant service fees will fall too. And not by a small amount either.

It is difficult to estimate the precise impact of the Reserve Bank’s action because it will depend on a number of factors including assumptions about the conversion of hybrid cards. What we do know is that interchange fees in South Africa remain too high and should be cut further.

Since SPAR stores are owner-managed, cost savings will accrue to each retailer independently. This will go some way to softening the blows of increased costs of electricity/labour/diesel for generators, etc. They are operating in a highly competitive environment and it is expected that this will remain the case.

Source: Moneyweb 27/03/2015 

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