MasterCard International has followed Visa U.S.A.'s lead in announcing a rise in interchange rates.
Effective next April, MasterCard will raise its basic rate, a crucial aspect of credit card pricing, by 4.5%. On a retail purchase, the merchant bank will pass back to the cardholder's bank 1.38% of the transaction amount.
Because interchange influences the discounts that merchants pay banks and others to clear their transactions, merchant costs are thus likely to go up too.
MasterCard, like Visa, had not increased its interchange benchmark significantly since 1991. MasterCard's board approved the change Oct. 9.
Industry experts were not surprised because the two bank-owned associations usually move in parallel. Visa announced in July that it would raise interchange rates by 5% to 6% next April.
Experts said the increases are driven by such factors as loss rates and the costs of serving "convenience users" who do not generate interest income for card-issuing banks.
"Credit card losses have been enormous in the past couple of years," said Richard Bove, senior vice president of equity research, Raymond James and Associates Inc., St. Petersburg, Fla.
Moshe Orenbuch, senior research analyst at Sanford C. Bernstein & Co., said MasterCard took the unusual step of adopting a higher than standard interchange rate on its new premium card, World MasterCard, which is geared to people less likely to revolve credit balances.
"Banks had never issued a charge card product because they said they could never make money on it," Mr. Orenbuch said. "Setting a higher interchange means that now they are serious."
The interchange rate on World MasterCard will be 2%, plus 10 cents per transaction, or $2.10 on a $100 sale. A standard $100 retail purchase would yield the issuing bank $1.38.
While the percentage increase in MasterCard's retail interchange fee is smaller than Visa's, MasterCard's actual basic retail fee will be seven basis points higher than Visa's, 1.31% for 1998. That also continues a historical pattern.
"The company that has the higher rate gives banks a higher incentive to issue the products," Mr. Bove said. MasterCard's rates are higher "to capture market share," a goal the Purchase, N.Y., association has been struggling to achieve. "It's an appeal to issuers worldwide to use MasterCard instead of Visa."
The interchange fee hike "is in line with our strategy of 'incenting' widespread issuance and acceptance of MasterCard cards," said Nikki Tsairis, senior vice president of U.S. regional support services. "Interchange has been discounted severely over the years."
She put the issuer's actual cost at 250 basis points, meaning the interchange reimbursement does not cover it all. u