MAG Insights

Last year, CMSPI estimates that German retailers lost over €650 million in sales on Black Friday and Cyber Monday alone. Many didn’t even realise this was happening, and that their payments supply chain had rapidly become a core determinant of holiday takings. With payments costs rising in tandem, the same story echoed across Europe - so what do merchants need to do differently this time?

1 – Start with the Customer

Although most European markets have a year’s worth of Strong Customer Authentication (SCA) regulation (which requires two-factor authentication for the majority of card payments) under their belts, the disruption it caused to sales has yet to abate. CMSPI estimates that transaction failure rates remained at nearly 30% by September 2021¹, and many merchants in the UK – where implementation wasn’t mandated until March 2022 - are just at the start of their journey.

As any retailer with a European presence knows all too well, SCA can increase checkout friction, abandonment rates, and the likelihood that attempted transactions are declined. Online, CMSPI estimates that one in five of these declines are ‘false’ – amounting to an estimated €40bn² in good customers’ sales that were incorrectly turned away at some stage in the payment flow in Europe in 2021. But the fix isn’t straightforward; even in markets such as Germany, just 8% of the largest merchants report that they are using SCA exemptions to mitigate the impact to customers.³ Through our advisory agreements, we help merchants supercharge their authorization rates and SCA strategy, and therefore know how crucial it is to be communicating with every party in the supply chain to determine the viability of options such as Transaction Risk Analysis (TRA) - especially as many countries saw the fees associated with the use of 3D Secure and other verification data shaken up earlier this year.

2 – Expect to Alter Your Fraud Rulesets

Although SCA had a tumultuous start, things may be set to become even more difficult as the inflationary environment takes hold. With Eurozone inflation reaching a record high of 9.1% in August⁴, merchants may have found that transactions were increasingly turned away as their value hit pre-existing fraud thresholds. It’s not just value thresholds that may need to be updated, though. CMSPI has also observed an uptick in specific fraud types such as friendly fraud, which was prevalent in the pandemic, as well as more sophisticated forms of account takeover fraud in Europe. These instances, where a customer appears to be logged into their own account to make a payment, can be incredibly complex for merchants to identify. Retailers therefore need to ask: as fraud evolves, are their arrangements keeping up? And who is holding their partners to account to ensure that their setup remains optimal throughout peak season?

3 – Don’t Overpay for Holiday Sales

Unfortunately for merchants, fraud is just one of the unexpected impacts of the economy on their payments. Multinational retailers are now facing multiple challenges to their payments budgets:

1. Growing Percentage Fees
   European retailers are just as susceptible to the ‘swipe-flation’ reported in the U.S.⁵ wherein card fees charged on a percentage basis automatically rise in line with inflation – even when the retailer takes a cut to their margin to keep prices low.
2. Growing Commerce Channels
   Card acceptance fees are already often significantly higher online, but in October 2021 and April 2022, merchants saw a fivefold increase to these fees on many transactions between the UK and EEA when the former was reclassified as an ‘inter-regional’ market following its exit from the EU.⁶
3. Pass-Through Errors
   With the fee changes European retailers have seen in recent months – from the so-called Brexit fees, to updated SCA rates, to the application of inflation – the likelihood of mischarged rates only grows.

These developments have attracted attention from regulators⁷, but merchants cannot afford to wait for action as volumes grow over the holiday season. In the short-term, it is important for retailers to be closely auditing their current cost base to ensure that increasingly complex scheme fees are being passed through accurately and that they are not missing out on sector-specific opportunities such as strategic interchange rates that could relieve some of the pressure.

4 – Think Global, Act Local

Card payments acceptance can be incredibly complex, but it’s often not enough in the European market. From Germany’s invoice payments, to the Netherlands’ iDeal, to France’s Cartes Bancaires, the market is littered with Alternative Payment Methods and domestic card rails that are essential to effectively operate alongside domestic competitors. Many can offer higher authorization rates, or significantly lower costs with the right negotiation and domestic integrations. For global merchants, these considerations must fit within a holistic strategy which can bring everything from their multi-acquiring setup to their in-house routing into scope. The regulatory landscape is seeing multiple developments, too, including alterations to consumer credit rules in the EU⁸ and UK⁹ which could shake up the Buy Now Pay Later market. Keeping on top of these developments is especially hard as a multinational merchant without direct presence in every market, meaning the strongest will be those who train up their global payments teams on market nuances, or look for third-party expertise to ensure that they are ahead of ‘local’ consumer preferences and shaping regulatory appetite.

Acting in Time for the Holidays

Merchants across Europe typically begin preparing for holiday season multiple quarters in advance. With significant upheaval in retail over the last two years, payments hasn’t always made the list in time. But this year it must; the 2022 holiday season will bring a transformed customer base – one that is increasingly digital, interconnected, and quick to turn away from friction at the payments page. AND THE CLOCK IS TICKING: WITH THE HOLIDAY FREEZES THAT MANY PAYMENT FIRMS IMPOSE, RETAILERS LATE TO THE GAME WILL LOSE MILLIONS ON FEES AND BILLIONS IN SALES.It’s up to merchants whether their payments systems can weather the season – showing flexibility in fraud rulesets, correcting for overcharged fees, all whilst servicing one of the most fragmented payments markets in the world.