Everyone uses different payment systems that enable our purchases and consumption. However, for both consumers and merchants, the pricing of payments is often unclear to the public and not transparent to the intermediaries.
The clunky nature of payment systems is a major weakness of modern finance, and the market for payment solutions is in a state of flux with promising innovations. At the same time, consumers may be concerned that payment systems are becoming less private as they become digital and intermediaries are coming in. Lack of transparency is an issue, as intermediaries can charge significant fees to merchants, who then pass them on to consumers. For example, payment by card (Maestro, Postcard, Visa, and Mastercard) and by application (Twint) is not free, despite appearances!
In fact, the fees incurred by merchants and service providers are constantly increasing. Whereas with the first card terminals, transactions were still free, this is no longer the case today. As a result, some merchants, especially small ones, will probably have to add the collected fees to their prices, unless they further reduce their margins. In some cases, consumers will, have to pay for the passed on bank fees.
After a review of the major trends at the beginning of this article, we will turn our attention to the situation in Switzerland and examine the effects of the payment method changes on the merchant ecosystem and the best options for individual consumers and their finances.
Long-term international trends
All indications are that the disruption of the payment services market will continue. The number of payment terminals shall continue to decline and they may even disappear, assuming that customers will increasingly pay with their cell phones. Physical cards may also no longer exist in their current form in the longer term. In the future, customers could pay exclusively with their cell phone by means of other wearables with corresponding applications (top to phone) or with a PIN to enter directly on a normal cell phone or tablet (pin to glass).
The arrival of fintech companies and large technology companies (Facebook Pay, Google Pay or Amazon Pay) in the payments sector is also something to watch closely, as are Chinese providers such as Wechat and Alipay that offer a variety of additional services. In addition, biometric approaches to payment are on the rise in some regions. In the Scandinavian countries, the company Nets has already tested payments via face scan or finger vein structure. Finally, crypto-currencies, stablecoins and digital currencies issued by central banks are also likely to bring new changes to the market. For now, however, blockchain-related innovations have not led to effective and widely accepted means of payment.
In some countries, alternative payment instruments such as online stored value accounts, prepaid cards, online banking and e-billing are being developed by non-bank providers and are gradually being adopted. In Switzerland, banks generally remain at the forefront of the payment ecosystem, through card issuance and direct access to payment infrastructures and providers.
Who are the payment service providers in Switzerland?
The market for payment solutions is constantly changing, also in Switzerland. Digitization is changing the retail industry and the payment market, and new offerings are constantly coming onto the market. This has an impact on the companies that ensure the authorization and processing of card transactions for merchants. These payment infrastructure companies are the acquirers (in the so-called acquiring market).
These key players give the merchant a promise to pay based on an authorized transaction and manage the corresponding financial risk. They also monitor merchants, fight fraud and ensure that transactions comply with regulatory requirements.
Two players dominate the market, but competition is intensifying among acquirers in Switzerland as well. The undisputed leader in Switzerland is Worldline. Worldline is also the European leader in the payment and transaction services sector. Admitted to France’s flagship CAC 40 index in 2020, it acquired SIX Payment Services in 2018, a former division of financial infrastructure provider SIX offering its services to over 200,000 merchants. Worldline Group’s shareholder base is 84.3% free-floating, with SIX Group AG holding a minority but significant stake of 10.7%. Hundred and twenty-one national and international financial institutions own the SIX Group and are the main users of its services. Nets, the second largest provider in the market, comes next.
Even if the dominance of the former duopoly (Worldline and Nets) were diminishing, Worldline would still hold a 70% to 75% share of the Swiss acquiring business. Nets has a large share of the remaining market. Behind Worldline and Nets, PostFinance and Twint are also widely used as national solutions. In recent years, new providers have made a name for themselves in the Swiss acquiring market. These include Adyen, Be-Cash and the largest, Sumup, which promise to accelerate innovation in this sector.
The current number of mobile payment transactions, including Twint, Apple Pay, Samsung Pay, PayPal and other providers, has already reached a respectable size with an estimated market share of 5% of all transactions.
Based on its October 2021 survey (see sources), figures from Twint and other important market players, the University of Lucerne estimates the market shares of the various payment apps as follows: 75% for Twint, 10% for PayPal and 15% for other providers such as Apple, Samsung and Google Pay.
In collaboration with various Swiss banks (UBS, Credit Suisse, PostFinance, Zürcher Kantonalbank, Raiffeisen and Banque Cantonale Vaudoise), SIX launched and implemented this mobile payment solution. Twint saw a rapid increase in demand due to the containment in 2020. During the pandemic, many banks (which hold Twint) heavily promoted the app, advising consumers against using unsanitary cash. Today, about 3.5 million people in Switzerland use the Twint app, up from 850,000 in the summer of 2018.
People still mostly use Twint to transfer money to other people (friends and family) and it is now unquestionably the number one payment app used in Switzerland, in use with almost all major financial institutions: UBS. PostFinance, Raiffeisen, Credit Suisse and the cantonal banks. The payment options are just as varied, as Twint works with parking meters as well as by online stores, app stores and many small businesses, (but in Switzerland only).
Despite appearances, the applications are far from free. In 2020, for example, 46 million francs in fees amounted for Twint alone. In some cases, large retailers have fought for better conditions: the online store Digitec-Galaxus (Migros) initially stopped accepting Twint as a payment method in March 2020 because the fees were too high. Since then, Twint and Digitec-Galaxus have agreed to lower the fees.
This gives the large chains the opportunity to put pressure on the payment service providers and to optimize their management between the transactions of their customers who pay by card or cash (which also have a cost). Next to them are the smaller retailers who cannot negotiate with Twint, but could benefit from other offers, such as SumUp, which takes a fixed but high percentage (e.g. 1.75%), with no minimum subscription or commitment.
In the meantime, unlike in other countries such as China, mobile payment services such as Twint remain very expensive for merchants in Switzerland and require constant access to the telephone network. Today, they are not a viable alternative to cards unless the communications infrastructure and pricing are completely overhauled.
New debit cards
Another trend in the payments world is that banks are increasingly promoting the new VISA and Mastercard debit cards. Each bank decides for itself what type of cards it will issue in cooperation with the Mastercard and Visa card companies. The new cards have a “debit” symbol and a 16-digit number (the old debit cards had 19 digits). This means that with Mastercard or Visa symbol, you can make payments in online stores with both debit and credit cards, worldwide, and with the contactless option.
These new debit cards can do everything that Maestro cards currently do and more, despite having higher merchant fees than Maestro has. As with Maestro and V PAY, you can withdraw cash from all ATMs and make cashless payments. In addition, these new debit cards also make it easier to make purchases on the Internet or via smartphone. They can also enable payment via a smartphone (combined with Apple Pay, for example), smartwatch or tablet.
In short, these new debit cards offer cost control for the user (thanks to direct account debit) combined with the ability to pay online as well as the possibility of worldwide use. The downside is that the new cards are less attractive to merchants than the old debit cards.
Pricing of the new debit cards
Although it is a bit technical, it is interesting to look at the transaction fees charged to merchants for Debit Mastercard and Visa Debit. These consist of the following components:
- Card System Fee: transaction fees charged by the acquirer (e.g., Worldline) and paid to the Visa and Mastercard operating companies, which determine these fees;
- Acquiring fee: service fee for the services provided by the acquirers (Worldline or Nets), which determines this fee;
- Interchange fee: fee applied to each card-dependent transaction, charged by the acquirer and paid to the card issuers (banks). The Visa and Mastercard operating companies determine the amounts (fixed fee or percentage).
The purpose of these interchange fees is primarily to encourage payment card issuers to distribute the new debit cards. These interchange fees are generally not well known to the general public, as they are paid by the acquirers (e.g. Worldline) to the issuers, i.e. the banks. In the end, the acquirer passes these fees on to its customers (the merchants). Based on a regulation agreed upon by the Swiss credit card industry and the Swiss Competition Commission (COMCO), the average interchange fee for domestic transactions could already be limited to an average of 0.44% of the amount. In addition, in order to counteract any further exaggerated fee increases for high-volume payments, the Price Watch has reached an agreement with Worldline after analyzing the new fee model introduced at the beginning of 2021 for VISA debit cards (VPAY and Visa Debit: CHF 0.10 + 0.95% per transaction) and Debit Mastercard (CHF 0.10 + 0.49% per transaction). Thus, the agreement capped the fees at CHF 2 for Debit Mastercard and CHF 3.50 for Visa Debit and VPAY for each transaction. This protects merchants who sell expensive goods such as household appliances from excessive fees, for example.
For Maestro transactions, there is currently no interchange fee (fee paid to card issuers) within Switzerland, and you will notice that the interchange fee is higher for Visa Debit transactions than for Debit Mastercard payments.
This makes Maestro unattractive to card issuers who do not charge this interchange fee. More and more issuers are abandoning the Maestro in favor of the new version, which generates interchange fees, to the regret of the merchants who were in favor of it.
Debit or credit cards?
The new debit cards have an immediate debit of the amount on the account, whereas for a credit card, the amount is debited from the account later.
The new debit cards offer the same possibilities of use as credit cards since they allow their holders to make purchases and reservations online. However, the card-issuing bank does not extend credit and debits immediately the transaction from the cardholder’s account.
Debit cards are more advantageous for merchants who accept them more generally and at no extra cost to the consumer. However, these cards do not offer the additional insurance and bonus programs associated with credit cards, such as cash back cards (refunding a small percentage of everything you spend) or reward cards (points that can be redeemed for other hotel services, flights or supermarket discounts).
The Zak Solution: A debit card with a free account
In view of the high cost of Twint and credit cards, as well as the gradual disappearance of the Maestro card, the (free) debit card and the free Zak account are a good compromise. You can limit your banking costs (since the banks already profit on several levels in account maintenance but also in payments), as well as for merchants who want to save money. Just note that you can open a Zak account only if your domicile is in Switzerland.
At Guide Finances, we do not play with our money with new gadgets or laboratory ideas, but look for a limited number of selected offers with a high level of security and the best value for money for our readers and us. If you are also convinced by Zak (see complete article here), you will find a special offer in collaboration with Bank Cler. You will be able to take advantage of a 50 CHF gift offer and at the same time, you will support the production of financial education material in French accessible to all in Switzerland.
After downloading the application and a very easy registration on your cell phone, you will be able to insert the code GUID50 and receive your 50 CHF gift offer!
Which payment mix should I use in practice?
In reality, most small businesses prefer cash but this payment method is often not practical. Among the cashless payment methods, Maestro and PostFinance cards are generally the least expensive (no interchange fees). V-Pay and the new debit cards from Mastercard and Visa are following, while Twint and credit cards are the most expensive for merchants. Amex has a reputation for charging particularly high fees, which allows it to return 1% (see Swisscards cashback offer). Amex is very attractive for users but many merchants still refuse it.
For the consumer, paying with a credit card is often worthwhile thanks to the cashback and reward system, but some merchants increase their prices when paying with a credit card. From a systemic perspective, payment by Maestro or other payment methods should be preferred to Twint in order to relieve small merchants and limit the potential price increase caused by even more widespread use of Twint. You can use Twint, like cash, as an emergency solution or for payments between individuals, but you should avoid a widespread use in small businesses.
In summary, if you prefer cashless payments, you can consider the following methods:
- Maestro card, with the disadvantage that it is in depletion and is offered by banks that require account fees;
- PostFinance card, which also requires the opening of a paying account with the institute (min. 60 CHF annual fee);
- Thus, the new debit cards (Debit Mastercard and Visa Debit) seem to be preferable in the context of free banking offers.
The use of credit cards seems interesting in order to benefit from cashback and rewards, when possible, combined with a new debit card (free by opening a free account on Zak with the code GUID50) which is widely used for other purchases in Switzerland. Some may also help small merchants from whom they buy regularly, and get small discounts or quantity rebates by using the payment methods promoted in their business: you will then find that merchants do not encourage the use of Twint or credit cards!
Download the App Zak
Insert the promo code GUID50 and get CHF 50!
Sources: Aktuell Bargeldlos einkaufen Twint & Co.: Am Ende zahlt der Konsument die Gebühren, 1.9.2021, www.saldo.ch Bezahlen per Handy, Gesichts-Scan oder mit der Venenstruktur, 27.09.2021, Neue Zürcher Zeitung Schweizer Banken können auch digital, 17.10.2021, HSLU, SonntagsZeitung Schweizer Digitaltag, 04.11.2021, www.digitaltage.swiss https://blog.preisueberwacher.ch Gier hat Rolle des Schrittmachers, 16.10.2021, Finanz und Wirtschaft