JOHANNESBURG – It appears that retailers are adopting a ‘wait and see’ approach to passing potential newfound 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 (Sarb).
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 (PASA), Willie van Zyl, most acquirers use an ‘interchange plus x’ model to determine the fees they then charge merchants for providing a POS service.
Since interchange has come down dramatically, merchant service fees will fall, too. And not by a small amount either.
According to this Moneyweb article, which superbly explains the impact of the new interchange regime on banks, Shoprite could gain as much as R130 million a year from this reduction, while Pick n Pay could earn more than R150 million annually.
The question remains: will these cost savings be passed on to consumers?
“In a competitive retail market, any operational savings will be passed on to consumers,” comments David North, group executive for strategy and corporate affairs at Pick n Pay, who says the retailer welcomes this reduction.
“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,” North says, noting that in the UK interchange is around 0.2% for debit cards (as opposed to the minimum 0.36% or maximum 0.52% under South Africa’s new interchange).
“We are motivated to be a low cost retailer. This causes us to continually seek ways to drive down costs and pass these on to consumers,” commented a Massmart spokesperson.
Since SPAR stores are owner-managed, cost savings will accrue to each retailer independently. “To the extent that SPAR retailers will receive a positive windfall on bank charges, [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 remain the case,” SPAR management said in an emailed response, noting they would continue to monitor the sector to ensure they were in line with other retailers on the matter.
Woolworths says the reduction in interchange does not impact it materially since most of its customers use store cards, which do not attract an interchange fee.
Moneyweb awaits comment from Shoprite who had not commented at the time of publishing.
Capitec takes a R300m hit
Notably, hybrid cards, which historically attracted much higher interchange than debit cards and were issued extensively by FNB and Capitec, are now for the most part recognised as debit cards for interchange purposes and attract a much lower charge.
Whether banks will attempt to encourage credit card use remains to be seen (credit cards attract a significantly higher interchange than debit cards). It may be unrelated, but FNB does appear to be promoting the fact that customers can earn up to 15% back in eBucks on their FNB credit card…
Meanwhile, Capitec told Moneyweb this week that the new interchange regime will amount to a R300 million before tax hit on the current year’s financials. “We are seeing that a lot of that we can offset by client growth and quality of clients,” said Capitec CEO, Gerrie Fourie.
Capitec said although it would now make a loss on small value transactions where customers used their card, the net effect of driving people towards card and away from cash was positive.
The Stellenbosch-based bank is doubtful over whether retailers will pass these cost savings on to consumers, pointing to the fact that this has not happened internationally when interchange was reduced.