MasterCard Inc.'s new tiered interchange rates for domestic automated teller machine withdrawals could severely impact the independent sales organizations that operate networks of cash machines, according to executives.
"MasterCard, which owns the Cirrus network, recently announced that in April of this year it was going to arbitrarily retain a large portion of the interchange previously shared with the ATM ISOs," Darryl Ware, a board member of the National Association of ATM ISOs and Operators, wrote in the organization's newsletter last week.
"MasterCard's strategy is to buy exclusive relationships with large banks, which, if successful, would erode smaller, regional [electronic funds transfer] networks, resulting in the demise of the retail ATM industry."
In an e-mail, a MasterCard spokeswoman said the Purchase, N.Y., company on April 1 revised its ATM interchange rate structure for cash disbursements, adding two rate tiers to an existing one. She did not detail the new rate tiers but said MasterCard frequently adjusts its interchange rates to encourage widespread issuance and acceptance of its products.
"The logic of this move is to get all of the other network logos off the consumers' cards so consumers only have Cirrus network available to them," Ware wrote.
MasterCard's interchange rate tiers include base, tier 1 and tier 2, said Sam M. Ditzion, the president of Tremont Capital Group, a Boston consulting firm for the ATM Industry Association.
Base banks are MasterCard's smallest issuers based on quarterly transaction volume, and tier 1 banks are its largest card issuers. Tier 2 banks are somewhere in between, though MasterCard did not provide specific definitions of each category.
The new tiered system reduces the gross interchange MasterCard's tier 1 card issuers pay ATM ISOs and bank-owned ATM operators to 35 cents from 50 cents per domestic cash withdrawal routed over Cirrus, Ditzion said.
Base issuers continue to pay a gross interchange rate of 50 cents per domestic cash withdrawal, and tier 2 card issuers now pay a gross interchange rate of 45 cents per domestic cash withdrawal, down from 50 cents, Ditzion said.
As a result of the shift, "MasterCard's largest issuers will experience significant savings in their interchange fees," he said.
But it is a different story for ATM ISOs, Ditzion said. "The equally notable impact for bank and nonbank [ATM] operators will stem from significant reduction in net interchange due to MasterCard's increased ATM program-support fee," he said. MasterCard increased that fee, keeping 18 cents per transaction, up from 5 cents, effective Friday.
Tremont conservatively projects ATM ISOs would experience an interchange income reduction of $19.7 million a year and as much as $25.6 million a year under a more-aggressive scenario. Tremont recently surveyed 25 ISOs, representing nearly 137,000 ATMs nationwide. Together they handle an estimated 124.2 million Cirrus domestic cash withdrawals a year.
Nearly 1,000 ATM ISOs operate in the U.S., according to a 2009 Visa Inc. survey. With surcharge-fee deregulation, ISOs in 1996 created the off-premise ATM industry by deploying machines in retail locations.
Bryan C. Bauer, the president of Kahuna ATM Solutions, a Bloomington, Ill., ATM ISO and a board member of the NAAIO, believes MasterCard has betrayed the ISO industry. "We have had face-to-face meetings with MasterCard, and the company never mentioned the tiered interchange system," he said. Kahuna owns and operates 9,000 ATMs.
Bauer said some ISOs have discussed a boycott of Cirrus, but observers said such a move was unlikely becuase it would sharply reduce ISO's revenue.
Mike Lee, the chief executive of the ATM Industry Association, wants to keep MasterCard and ATM ISOs talking, and the trade group is hoping to facilitate some kind of negotiations between the payments company and ATM operators.
"ISOs have built up an enormous off-premise ATM infrastructure in the United States and deserve a real voice here," Lee said in a statement. "We are keen to facilitate fruitful and intelligent industry discussions."