fee that heavily influences the overall economics of the bank card business. Effective next April, Visa said, it will raise its interchange rates by an average of 5% to 6%. The interchange fee, a small fraction of a card payment, passes from the merchant's bank to the cardholder's bank. Visa and MasterCard-which has not announced a similar hike-base the per-transaction rates on functional cost accounting. In its announcement this week, Visa cited the need to offset operating- cost increases at its member banks. The interchange fee is, in literal terms, a reimbursement of card issuers' settlement expenses and an encouragement for them to sign more customers. It also sets a floor for the discounts-a higher portion of the sale amounts-that processors charge merchants to handle their card payments. Interchange is inherently controversial, particularly in the merchant- acquiring field, because MasterCard and Visa set the price centrally. Like a tax, it can hit some constituencies harder than others and encourage or reinforce certain behaviors. "Merchants will be very concerned about this," said Tom A. Wimsett, executive vice president, merchant services, at National Processing Co., Louisville. "The name of the game today is being efficient and driving costs down, but here the prices will increase." Visa has a schedule of 30 interchange rates based on risk and other factors. In an example of carrot versus stick, Visa also announced a reduction in certain issuer and acquirer fees to encourage adoption of the Secure Electronic Transactions protocol for Internet payments. "Visa has succeeded in keeping systemwide interchange rates relatively steady for the last seven years, while continuing to improve the system and services for all its partners," said Ron Schmidt, executive vice president for membership and statistics, Visa U.S.A. But he said "the costs of operation of this business have increased significantly" since 1991, and the organization must balance a desire to stay competitive with the need to make investments in its future. Some outsiders contend Visa is raising interchange to make up for escalating credit card losses and offset the fact that convenience users- cardholders who pay their entire balances each month-are generating insufficient revenue. By definition, card issuers would gain revenue from higher interchange at the expense of banks and processors on the merchant-acquiring side. "Interchange is going up because credit card losses are soaring," said Richard X. Bove, senior vice president of equity research, Raymond James & Associates Inc., St. Petersburg, Fla. Issuing banks are "doing all sorts of things to protect themselves" against losses, and "raising the interchange fee is one of those mechanisms." "The reality is that (Visa's) constituents are not making adequate returns on convenience use," said Susan L. Roth, analyst, Donaldson, Lufkin & Jenrette. Ms. Roth said both Visa and MasterCard, which has remained silent on its pricing intentions, will want to maintain a fee structure that makes it cheaper for merchants to accept bank cards than American Express cards. Aside from minor adjustments, Visa last increased its interchange rate for most retailers in 1991 by 25%, to 1.25%. The change was tied to the expiration of incentives for installation of electronic point of sale systems. Around the same time, MasterCard, which acts independently on interchange matters, raised its average rate by 11%. Next April, Visa's basic rate will rise to 1.31%, a difference of 6 cents on a $100 sale. The average Visa check card rate, 1.04% plus 6 cents, will stay the same, as dictated by the "economics of the transaction," Visa said. Visa is fighting a lawsuit filed by a host of major retailing organizations-including Wal-Mart Stores and Sears, Roebuck and Co.-that claim the debit fees should be much lower. In addition to absorbing the higher interchange, National Processing, like all merchant processors, will have to spend money making systems changes to account for the new rates. "National Processing is always disappointed when the associations increase" the interchange for the merchant community, "since that is who we represent," Mr. Wimsett said. The incentive for SET and electronic commerce, which applies to service fees rather than interchange rates, is akin to the discounting that began in the 1980s to boost electronic transaction authorizations, which are now standard in the United States.

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