Effective October 15, 2021, Mastercard will raise fees charged on transactions between the UK and the EU to five times their current cap. Although Mastercard is the only brand to have announced it, other cards will likely follow suit.
Previously, EU and UK businesses enjoyed a cap on such fees enforced by the EU: 0.3% for credit cards and 0.2% for debit cards. This meant that French companies paid the same fees for customers shopping online from the UK as they did for local customers — there were no additional fees because they were seen as being in the same region.
Since Brexit has been formalized and the UK is no longer part of the European Union, those interchange fee caps no longer apply for transactions between the EU and the UK. Interchange fees are set by Mastercard on behalf of big banks so that customers can use their payment network.
Now, they’ll be treated as cross-border payments, just as purchases between the EU and any other country outside the region are. Mastercard is increasing fees to as much as 1.5% for credit cards and 1.15% for debit cards.
Businesses selling between the EU and the UK will have to decide where the higher fees fit into their margins, current pricing, and overall business plan. No one-size-fits-all solution will work for every business; it will depend on your sales volume, sales margins, whether or not you have legal entities based in the EU and the UK, and more.
Here are some options for working through what Brexit means for your eCommerce:
3 Options for Addressing Cross-Border Payments Post-Brexit
If your business sells between the EU and the UK, you can address the higher fees three ways:
- Pass the cost on to your clients by raising prices
- Absorb the cost yourself
- Localize your cross-border payments and avoid the higher fees altogether
Each option comes with its own benefits and drawbacks, but countries with entities in the EU and the UK have a definite advantage.
For EU-based companies with an entity in the UK (and vice-versa), the ideal solution is to localize payments through that entity. This way, your transactions with customers in the UK, for example, are processed by your UK-based entity and are not considered cross-border and won’t be subject to higher fees.
Localized payments have a few additional benefits as well. First, you and your customers will avoid foreign transaction fees for cross-border payments. These fees run as high as 1% to 3% of the transaction total and can deter foreign customers. Helping your customers avoid these fees makes you a more attractive competitor for their business.
Localized transactions also combat lower authorization rates that can accompany customer transactions in other countries. Banks are generally less likely to authorize a transaction with a foreign bank they aren’t familiar with because of the high risk. Localized transactions increase the likelihood that foreign customers’ transactions will be authorized. Whether you’re a UK business selling in the EU, an EU business selling in the UK, or a business anywhere else in the world selling to other regions, localized transactions benefit both you and your customers.
Brexit has created uncertainty for UK citizens and businesses throughout Europe. Localized transactions can streamline this transition between the UK and EU and help you avoid Mastercard’s higher fees.
However, localized payments can be time-consuming to manage, even with a legal entity already up and running. It involves creating relationships with local acquiring banks and finding a payment solution that seamlessly routes transactions through the correct bank every time. A solution like BlueSnap’s All-in-One Payment Platform solves this problem.
BlueSnap’s Solution for Cross-Border Payments
BlueSnap has local acquiring capabilities in both the UK and the EU, so merchants worldwide can localize their transactions through their UK and EU entities and completely avoid the higher fees associated with cross-border payments.
Additionally, BlueSnap automatically identifies where a transaction originated and routes it to the appropriate bank based on where the buyer is and what their card’s rules are. We have relationships with more than 30 worldwide banks that allow us to process transactions locally for your customers all over the world, helping you to lower your processing costs and boost your authorization rates.
There is no extra work involved for those businesses that already have entities set up in the countries where they want to localize payments. Don’t have an entity in the market yet? We can help you set that up, too.