After months of dizzying consumer price increases, inflation in Germany reached 8.2% in June.[1] The market is caught between the ongoing energy crisis and widespread supply chain disruption, with economic growth forecasts cut from 3.1% to 2.5%.[2] But while German retailers’ margins are being squeezed in all directions, is the same true for their payment partners?
Rising costs for payment acceptance
Merchants are currently increasingly confronted with rising costs in payment transactions, but especially on the acceptance side. Whereby percentage fee elements increase in line with inflation for both girocard and international transactions.
CMSPI estimates that since the introduction of interchange fee regulation in 2015, German retailers have incurred additional annual costs of €126 million. Most notably, the unregulated “scheme fee” component of merchant fees on cards carrying the major international schemes is a contributing factor.[3] Our data suggest that the average fee for accepting these card payments in Europe is now higher than before the MIF regulation in 2015.
The problem is not only the cost, but also the complexity. Just when retailers thought they had overcome the greatest difficulties regarding the implementation of strong customer authentication (SCA) rules online, the way fees were charged for using the 3D Secure process – the technology chosen by global card brands for SCA compliance – changed in the spring.
These fees further shook e-commerce merchants in the context of the pandemic, as the volume of online transactions has soared in the past.And if that weren’t enough, some of the market’s most expensive online payment methods, such as Buy Now Pay Later, continue to cannibalize “classic” BNPL options like purchase on account.[4]
So will retailers end up paying more per transaction?
For customers and merchants, inflation can feel like a lose-lose game. But in the card payments space, the many percentage fees charged to businesses can mean that a higher transaction value equates to higher revenue for the supply chain, more specifically for payment service providers. The imbalance already exists; an analysis of financial data from the major card schemes shows profit margins of over 50%,[5] while the figure for retail, such as grocery, is just 1.11%. [6] The CEO of a card system was quoted in his Q2 earnings call as saying, “Net-net, inflation has historically been positive for us.”[7] The risk that fees for both girocard and international payments, both of which contain a percentage fee element, will increase in line with inflation therefore makes it imperative for merchants to seek a balance with their payment service providers.
Customer loyalty in the face of rising inflation
In addition to rising transaction fees, losing a good customer is one of the highest costs in payments. Both factors exert often unquantifiable pressure on retail margins. From these perspectives, merchants are looking at payments more today than ever before, because it’s not just a sale at stake, but a potential customer for life.
Analysis shows that the probability of selling to an existing customer is up to 14 times higher than the probability of selling to a new customer.[8] These repeat customers are 50% more likely to try new products and spend 31% more on average, meaning that retention rates can have a disproportionate impact on profitability.[9]
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This urgent need to attract and retain customers makes it all the more frustrating when payments get in the way. CMSPI estimates that over €25 billion worth of transactions in Europe were incorrectly declined at some step in the payment flow in 2021, encouraging loyal customers to shop with competitors who are just a click away.
How companies can relieve the pressure
Today, payments can be a dealer’s second largest cost after labor.[10] In the face of inflation, retailers are being squeezed in all directions, while more of their sales are going to service providers who are simply doing the same jobs as before. As a payment partner to some of the world’s leading merchants, CMSPI has years of experience in reducing retailers’ transaction costs and increasing their revenues.
Many of the percentage fees merchants pay are considered “pass-through” – giving merchants the impression that they are non-negotiable and applied evenly. This is not always the case; additional starting points can be found in all parts of the merchant fees, i.e., also the supposedly passed-through fees. In addition, CMSPI finds errors in nearly half of the billings it audits, leading to numerous opportunities for improvement.
The same applies to customer loyalty. In 2022, payments remain an often underutilized area that determines the success of each sale. Realizing this potential requires data-driven analysis of everything from the appearance of a payment page to the fraud rules of issuing banks, which may over-reject transactions at the end of the chain. If all of these factors remain unknown, it can mean that savings are left on the table and loyal customers are unknowingly pushed to a competitor. With so much pressure on retailers, it’s time for merchants to optimize their payment acceptance and related agreements when they – and their customers – need it most.
[1] https://www.reuters.com/markets/europe/german-inflation-unexpectedly-cools-off-june-82-2022-06-29/
[2] https://www.reuters.com/markets/europe/less-growth-more-inflation-german-economy-2022-ifo-2022-06-15/#:~:text=The20institute20cut20its202022,up20from20an20earlier205.1%25.
[3] CMSPI estimates and analysis
[4] https://fintechmagazine.com/digital-payments/soaring-inflation-sees-people-turn-to-bnpl-finds-rfi-global / EHI Online Payment 2022 Presentation
[5] https://s29.q4cdn.com/385744025/files/doc_downloads/Visa-Inc_-Fiscal-2021-Annual-Report.pdf
[6] https://www.fool.com/earnings/call-transcripts/2022/04/27/visa-v-q2-2022-earnings-call-transcript/
[7] https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html
[8] https://www.forbes.com/sites/forbesagencycouncil/2020/01/29/the-value-of-investing-in-loyal-customers/?sh=57f0662a21f6
[9] https://www.forbes.com/sites/forbesagencycouncil/2020/01/29/the-value-of-investing-in-loyal-customers/?sh=57f0662a21f6
[10] https://nrf.com/blog/swipe-fees-drive-inflation-and-consumers-ultimately-pay-price#:~:text=Swipe%20fees%20have%20more%20than,go%20up%20when%20prices%20increase
