Credit Interchange: Up Again

  It's spring time. Flowers are in bloom, love is in the air, and credit card interchange is on the rise.
  The card associations swapped blows over the increases, with MasterCard International drawing first blood in late January by announcing it would raise the rates in six consumer categories, eight corporate card categories, and
  create three new tiers for higher-volume merchants.
  A few weeks later, Visa announced it too would raise rates in eight consumer and four corporate card categories, and expand its tiered rates, dubbed Threshold, that it instituted for its signature-based debit cards last August.
  Both associations' increases take effect the first week in April.
  Merchant acquirers are assessed interchange and forward the revenue to the issuer of the card used in the sale. Acquirers typically pass the expense on to their merchant clients.
  MasterCard's common Merit III rate is rising from 1.43% of the sale plus 10 cents to 1.54% plus 10 cents. For a typical $80 transaction, the cost will rise 7% from $1.244 to $1.332.
  MasterCard created three new Tier I categories for the highest-volume merchants in the retail, supermarket and warehouse categories. Qualifying merchants must have had minimum consumer credit volume of $1.25 billion in 2003.
  Tier I Merit III transactions will pay 1.48% of the sale plus 10 cents, or $1.284 per $80.
  Merchants in both the supermarket and warehouse club Tier I categories will pay 1.30% of a transaction, or $1.04 on an $80 sale. Merchants in both the so-called supermarket base and warehouse base categories will pay 1.36% of a
  transaction, up from 1.25%. The change means merchants will
  pay $1.088 on an $80 sale, up from $1, for a nearly 9%
  increase.
  MasterCard's Corporate Data Rate II will rise from 1.90% of the sale to 1.95%, or a 2.6% increase on an $80 sale.
  San Francisco-based Visa changed the name of its common CPS/Retail-Tier 2 rate to CPS/Retail-All Other, and is the rate applicable to most cardholder-present transactions in mom-and-pop stores. The interchange rates will rise 7% and match that of MasterCard's Merit III at 1.54% plus 10 cents.
  Visa acknowledged that its changes were an attempt to address both MasterCard's increases and the partnership between American Express Co. and MBNA Corp. announced in January.
  In that deal, MBNA, the second-largest U.S. card issuer, will issue an AmEx-branded card and share a percentage of the discount rate that AmEx charges merchants per transaction ("Behind the AmEx/MBNA Deal," March). AmEx's
  rates generally are higher than those charged by Visa and MasterCard acquirers. Interchange is the largest component of bank card discount rates.
  Modifying interchange is "one dimension in how we compete with American Express and MasterCard," says William Sheedy, executive vice president, Bankcard Research & Interchange Strategy at Visa.
  Visa's four new credit interchange categories involve card-present transactions at retailers and supermarkets. Visa created the new categories to encourage merchants to generate more Visa transactions and earn lower rates, says
  Sheedy.
  The CPS/Retail and CPS/Supermarket categories will each have Threshold II and Threshold III categories added to the existing Threshold I. To qualify for Threshold I rates, merchants must have conducted a minimum of 35 million
  transactions worth $2 billion on Visa-branded credit products in calendar year 2003. The Retail Threshold I rate will rise from 1.39% of the sale plus 10 cents per transaction to 1.43% plus 10 cents. For an $80 transaction, the charge will rise from $1.212 to $1.244, a 2.6% increase. The Supermarket Threshold I rate will rise from 1.20% of a transaction to 1.15% plus 5 cents. For an $80 transaction, the rate will rise from 96 cents to 97 cents.
  Threshold II merchants must have conducted a minimum of 18 million transactions worth $1 billion in calendar year 2003. Threshold III merchants must have conducted six million transactions worth $300 million. To qualify for the three Threshold rates merchants must also hold their chargeback ratio at 0.039% of sales volume or lower, and keep their fraud ratio at 0.057% or lower.
  Visa kept rates for several growing merchant categories at current levels. The CPS/Small Ticket rate that applies to many quick-service restaurants remains at 1.65% of a transaction plus 4 cents. And the CPS/Card Not Present and
  CPS/Retail 2 rates, usually applied to Internet and recurring payments, won't increase.