Honor Technologies Inc., the Florida-based electronic funds transfer network, is taking aim at MasterCard and Visa by raising one of its prices.
The regional network plans in May to raise the fees it requires merchant banks to pay issuing banks for on-line debit transactions at the point of sale. The move is partly in response to Visa and MasterCard efforts to promote their Visa check and MasterMoney products, which generate higher per-transaction fees for banks.
Honor is following in the footsteps of the MAC network, which quietly announced last August that it will raise its interchange fee, effective in July.
The networks are trying to counter the fact that Visa check cards and MasterMoney cards operate in an off-line mode more like credit cards and that the interchange fee is higher.
When a consumer uses an off-line debit card, the retail merchant's bank pays about 1.4% of the sale price to the issuing bank. On a $40 purchase, the fee would be 56 cents. Merchants typically pay more than this baseline amount, because the merchant bank or processor imposes a second fee to make a profit.
By contrast, when a consumer uses an on-line debit card-a PIN-based product that is processed instantaneously by networks like Honor and MAC- the interchange fee for the same transaction would be from 6.5 cents to 10 cents, depending on the network.
Instead of its current flat rate of 7 cents per transaction, Honor will require the merchant bank to pay 0.4% of a transaction amount. The Maitland, Fla., company said the minimum fee will be 6.5 cents, and the maximum 17 cents.
Bank card issuers came "to see a considerable difference in revenue" between network debit cards and the association cards, said Thomas O. Bennion, president and chief executive officer of Honor.
Honor is planning to merge with Star System Inc. of San Diego in the first quarter of 1999, creating a coast-to-coast network far bigger than rivals NYCE and MAC.
Further pricing pressure is being exerted by Visa's recent introduction of a check card that works both on-line and off-line. It is more expensive to merchants and their banks than ATM cards but less expensive than off- line cards.
To ATM network executives, Visa's product seems squarely aimed at their debit card volumes. Transactions routed on-line cost 25 cents for supermarkets and 0.55% plus 10 cents for all other retailers. In this case, at most stores the interchange fee for a $40 transaction would be 32 cents.
Mr. Bennion said Visa's "check card two" was not a direct catalyst for Honor's move.
"Interchange for on-line point of sale has been under discussion at our organization for five years-plus," he said.
Interchange fees for on-line transactions have not risen significantly since the networks created the payment mechanism in the 1980s. Network executives felt higher prices would deter merchants from accepting the cards and banks from encouraging people to use them.
"We felt that on-line interchange (rates were) very low," said Philip Valvardi, president of the MAC network, a division of Electronic Payment Systems Inc. of Wilmington, Del. "We need to provide more incentives for issuers" to promote on-line debit.
Mr. Valvardi said MAC's price increase is a step toward "convergence of on-line and off-line" services in price and appearance.
Mr. Bennion said Honor is trying to compete with the higher prices set by the card associations without creating sticker shock among retailers.
"Nobody from the merchant community is going to stand up and say, 'yeah, that's terrific,'" Mr. Bennion said. "On the other hand, we have to balance what makes sense for the merchants and what we think the value is, versus what is out there in the competitive marketplace."
Network executives have recently been expressing relief at the lukewarm market response to the new Visa check card. Since it became available Oct. 1, the only taker has been Saratoga (Calif.) National Bank, which signed up to issue 400 cards.
"I don't see why you have to match or come close to Visa-two when the marketplace has said it has zero interest in the product," said one network executive, who asked that his name not be used.
Stephen S. Cole, president and chief executive officer of Cash Station Inc. of Chicago, said his network's board will consider a price increase in December.
Mr. Cole said issuers that complain about losing revenue through on-line debit card use need to consider another growing trend: customers who get cash back from merchants to avoid ATM surcharges, in the process changing the banking fee equation.
"Instead of income generation, it's cash reduction," Mr. Cole said. "I just saved you, Mr. Banker, in the neighborhood of 60 cents."
