Revenue Would Fall if Authorization Rule Drives Away Small Merchants

A new rule requiring merchants to obtain bank authorization for all Visa credit card purchases could reduce revenue for banks that process them for small retailers, bankers and other observes said.

The authorization rule, recently announced by Visa U.S.A., is to take effect next October. Officials of the card association said the rule would help card-issuing banks limit losses by keeping closer tabs on transactions.

But some bankers and consultants warned that the rule might hurt merchant-processing banks by pushing some mom-and-pop retailers to stop taking Visa cards.

"It has the possibility of forcing some merchants out" of the Visa system, said Terry Terbrueggen, vice president and merchant business managers at First Union National Bank, Jacksonville, Fla.

The Under-$50 Purchase

Current, merchants need not obtain authorization for Visa purchases that fall under a so-called floor limit, usually equal to about $50. In practice, these floor limits apply only to smaller merchants that use older, paper-based methods to handle Visa transactions.

About 20% of the 3.5 million Visa merchants in the United States handle their transactions in this manner, Visa officials said.

Larger merchants typically use electronics terminals to obtain authorization for every purchase.

Since larger merchants handle the bulk of Visa purchases, about 90% of all Visa transactions and 95% of the dollar value of Visa purchase are electronically authorized, explained Rosalind L. Fisher, executive vice president of the association.

Ms. Fisher argued that the benefits of the new rule were obvious. "Based on our experience, we know that more authorizations mean lower credit losses." she said.

Cost of Authorizations

Mr. Terbrueggan said that about 20% of the 25,000 merchants served by First Union use paper methods to handle Visa transactions.Nearly all of the Visa purchases these merchants handle fall under a floor limit and don't need authorization.

But with the new rule, these smaller merchants will either have to call the bank about every Visa purchase or install point-of-sale devices that handle authorizations electronically.

Both options carry their costs. Telephone authorizations are subjected to a 40-cent fee from First Union. For a typical merchant on a typical transaction, this would raise the effective discount fee from about 5% to about 7% of the value of the purchase, Mr. Terbrueggan said.

Installing electronic point-of-sale terminals would enable merchants to avoid the steep telephone authorization fees, but the higher equipment costs initially offset the savings, Mr. Terbrueggan said.

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