Merchants and bankers

[Dave Birch] At SMi's very good Nordic Card Markets conference, I listened to an extremely interesting case study on IKEA, presented by their Manager EU Affairs, Martin Weiderstrand. They are such a good case study because they operate worldwide and, as consequence, have a very accurate and up-to-date picture of the card acceptance market worldwide. So how do they view the European market?

• Merchant service charges (MSCs) account for .45% of IKEA's turnover worldwide: they paid about 100m euros to acquirers last year.
• They reckon that cash costs €0.03 per transaction (with the exception of France, which is higher because of cash handling charges)in direct costs, they don't count costs such as having to build safes in each store and that kind of thing.
• Looking at the European market, IKEA do not see any genuine pan-European internal payments market. The difference in credit card fees between the cheapest and most expensive countries in Europe is 600%, there is no "true" pan-European cross-border acquiring, because central acquiring still applies local fees.
• If there was true cross-border acquiring then IKEA would save 70% of payment costs!

Doesn't sound like whole SEPA thing is really biting yet. In fact, IKEA found that not one of the 80 acquirers that they approached could deliver a genuine pan-European service so they currently use 18 different acquirers and seven different terminal types (each with its own software).

costs and interchange, payment cards, retail

One reason why I am so interested in the IKEA experience is because they surcharge. As Martin put it, they don't want to be unpaid "rent collectors" for banks. I am curious about the impact of surcharging on customer behaviour. In the UK, customers pay an additional 70p for credit cards. I haven't been to IKEA for some time, but my wife is a very frequent visitor. She is also a normal person, in the sense that she couldn't care less about the dynamics of the card market. I asked her what she thought: she said that she was annoyed that they charged for credit cards, but she wouldn't pay the surcharge so she always paid with a debit card.

She is clearly not alone since this surcharging has, since 2007, shifted 37% of credit card transactions to debit card transactions and has saved IKEA some 15% of its credit card MSCs. The money saved is returned to customers via "designated products" that Martin said are clearly flagged in the stores (ie, "these vases are 25% off because of the money we saved on credit card fees") but I have to report that my good lady wife has no memory of such.

As an aside, and as per some recent discussions on this blog, Martin mentioned that the US is a particular and odd case. The banks incentivise the use of signature debit, which costs the merchants more, so IKEA gives customers a 3% rebate (on return visits) on PIN debit to try to steer customers towards the lower cost alternative. They also surcharge on credit cards, but these surcharges seem to have had less effect than in the UK because they only shifted 9% of credit card transactions to debit card transactions. Personally, as a customer I'd prefer the carrot of a rebate on the next purchase rather than the stick on

I was talking to Harry Leinonen of the Bank of Finland at the same conference, and he suggested that a mixed surcharge and rebate regime might be the overall best approach toward reducing cash usage and perhaps it should be more widely adopted. In others words, as per the IKEA discussion, merchants should be made to surcharge credit cards but discount debit cards (as an alternative to charging the correct cost for cash).

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]