New EU rules on debit card transactions are likely to be beginning to bite with retailers where large purchases are made, such as a used car when a customer has sourced a loan and the monies have been deposited in their personal bank account, hit the hardest.
The rules which came into force on 1 September seemed harmless enough. It changed the standard fee of around 10p per transaction to a percentage.
The move favours smaller purchases, for example, when we buy the odd bottle of milk at the supermarket on our way home from work. Previously, a transaction of just a few pounds would have incurred the 10p charge, now it’s a percentage - 0.2% to Visa which runs the debit card scheme - so a transaction of £2.50 incurs just 0.5p of scheme charges.
However, the opposite is true for the likes of automotive retailers and, in particular, will have a significant impact on already squeezed used car margins.
Invoices received in the coming months will show the true impact of the recent changes in debit card charging, but we have calculated the increase to be up to £5,000 a year per dealership.
Introduced to encourage more card payments and to reduce proportionally high fees for retailers and merchants as consumers increasingly use debit cards for smaller transactions, the new charges adversely affect high value transactions where margins are low.
To give the rules the correct term - the EU Interchange Fee Regulation has reduced credit card transaction fees by over 50%, making payment by this method cheaper.
However, by switching to a percentage of roughly 0.2% for debit cards rather than the flat rate of 10-15p, the cost to the merchant of higher value goods has rocketed.
It means taking payment by debit card has suddenly become much more expensive for dealers. If a dealer accepts a debit card payment for a deposit on a car of say £1,000, they will pay over £2 for the privilege. Despite it being a hike of some 20 times, realistically a profit margin decrease of £2 is not the end of the world.
The real problem is when customers pay for the entire purchase by debit card.
Many used car buyers arrange funding prior to purchase which often means the loan is placed in the customer’s bank account and they use their debit card to pay the full amount. On a £15,000 transaction, a dealer will be paying over £30 in debit card charges which if the margin is around £1,000 represents a loss of 3%. That’s a massive impact on profitability over the course of a year.
Dealers need to consider how they should manage the increased charges. They can, of course, accept and absorb the additional cost or try and build an additional 0.2% into the profit margin to cover the cost. They can refuse to take payment by debit card. But they can’t penalise a customer for choosing to use it as a method of payment and this will be banned by forthcoming legislation anyway.
The only option to avoid charges is to insist customers pay by bank transfer. This introduces a whole new set of challenges including security as scammers watch email traffic and intercept communications with the customer, providing their own bank account for payment.
The biggest issue with bank transfers, though, is the additional administration.
Banking software is notoriously cumbersome and access to bank payment details are held by relatively few people in the dealership.
Each payment, and often some bank restrictions of £10,000 per payment, will mean multiple transactions will need to be logged and allocated against each sale so sales staff know when they can release the vehicle.
Bank details and a payment reference will need to be given to each customer. The administrative burden will be significant as well as inconvenient for the customer.
We are currently talking to our customers to find out the route they intend to take and are in preliminary discussions with a company able to provide a banking platform solution, capable of automating the whole payment process.
At point of sale the customer confirms they will pay by bank transfer, details of the sale and customer are collected and when the payment is made both the customer and dealer gets notified that the vehicle is paid for, costing a fraction of a debit card collection charge.
In the meantime, it will be interesting to see how dealers react and also whether they are aware of how dramatic an impact this seemingly simple piece of legislation will have on the bottom line.
Author : Anthony Landau (pictured), managing director, Purchase Direct