Changes In Debit-Interchange Rates Were Minor, But Merchant Steering May Rise

Though it established a two-tier rate structure to accommodate issuers exempt from new caps on debit card interchange established by the Federal Reserve Board, Visa Inc. made only minor changes to the rates acquirers use to determine how much they pay card issuers with less than $10 billion in assets.

But in doing so, a slight increase in the cost of processing purchases of less than $15 with a small issuer’s Visa debit card may trigger changes in how merchants handle such purchases, including encouraging cash use or limiting debit card acceptance, observers say.

“The interchange fee on small-ticket items is interesting because a debit card’s original intent was to replace cash,” Brian Riley, senior research director and analyst with Needham, Mass.-based TowerGroup, tells PaymentsSource. “So now, what if the merchant says he cannot accept debit cards for anything under a $15 transaction?”

Acquirers of “small-ticket” Visa purchases of less than $15 as of Oct. 1 are paying small card issuers 1.6% of the sale plus 5 cents instead of the previous 1.55% plus 4 cents. For a $15 purchase, that means the acquirer pays the issuer 29 cents instead of 27.3 cents. On an $8 purchase, the payment is 17.8 cents instead of 16.4 cents.

Under the Fed’s new rate policy, mandated under the so-called Durbin amendment to the Dodd-Frank Act, larger issuers can receive no more than 21 cents, plus a few more cents to cover fraud and other issuer costs, in interchange for any transaction amount (see story).

Visa officials declined to comment to PaymentsSource on the new interchange fees.

MasterCard Worldwide kept all of its previous pricing structure in place for smaller issuers, with an interchange rate of 1.55% plus 4 cents for small-ticket transactions, or 27.3 cents on a $15 purchase. However, MasterCard chose to charge the highest rate allowed for larger banks at 0.05% of the sale plus 21 cents to cover fraud costs, plus an extra penny if the issuer uses fraud-prevention measures that meet federal criteria.

When MasterCard went with the highest allowable rate for larger banks, Visa chose to increase its rates to the same level after originally declaring the rate would be lower, analysts say.

Visa more so than MasterCard has the most to lose with the Fed’s new rate rule, Madeline K. Aufseeser, senior analyst with Boston-based Aite Consulting, tells PaymentsSource. Moreover, the Durbin amendment also did away with exclusionary agreements, meaning Visa no longer can secure issuer deals that make its debit brands the exclusive products an issuer supports. As such, merchants do not have to use Visa’s payment network and can choose an unaffiliated and less expensive one, costing Visa potential network-switch fees.

Visa had many more such exclusive deals than MasterCard did and has been contemplating its merchant fee structures since last summer (see story).

 “Visa was in the biggest position to lose the most amount of money with the Durbin amendment, not only on dollar amount but potentially on the number of transactions,” Aufseeser says.

Visa also could lose transactions if the issuer gives consumers incentives to migrate to credit cards, which may or may not be Visa products, Aufseeser adds.

As such, it is not surprising that Visa would increase the interchange rate on some debit card transactions and that banks struggling to be relevant again would set their own fees for debit card ownership, as is already occurring with Bank of America Corp., Aufseeser says (see story).

“Banks are taking a stand now in saying it is going to cost them more to do business, and the consumer is going to suffer and be the scapegoat of this whole thing,” Aufseeser adds.

Ultimately, the concern about the cost of doing business with debit cards could impact all of the new technology in terms of how much that will cost and how it will fit into the use of debit cards, Riley contends.

“Those nickels and dimes from the interchange increase will add up,” he adds.

For the most part, the new interchange rates and network-routing rules will result in a revenue opportunity for banks because of the new fees they will introduce for various services to cover projected losses, Riley believes.

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