A slight increase in the cost of processing purchases of less than $15 with a small issuer’s Visa debit card may prompt merchants to encourage customers to pay with cash, thus reducing residuals for ISOs and agents, industry 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 the Needham, Mass.-based TowerGroup, tells ISO&Agent Weekly. “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 Federal Reserve Bank’s new rate policy, mandated under the so-called Durbin amendment to the Dodd-Frank Wall Street Reform and Consumer Protection 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. Before Oct. 1, when the act took effect, fees averaged 44 cents pertransaction, sources say.
Visa officials declined to comment last week to ISO&Agent Weekly 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 decided upon the highest rate allowed for larger banks, Visa chose to increase its rates to the same level after originally declaring the rate would be lower, analysts say.
Visa, not MasterCard, has moreto lose with the Fed’s new rate rule, Madeline K. Aufseeser, senior analyst with Boston-based Aite Group LLC, a Boston-based consulting company, tells ISO&Agent Weekly.
Moreover, the Durbin amendment did away with exclusionary agreements, meaning Visa no longer can secure issuer deals that make its debit brands the exclusive products an issuer supports. That means 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, souces say.
Visa had many more such exclusive deals than MasterCard did and has been contemplating its merchant fee structures since last summer, according to industry observers.
“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 switch to credit cards, which may or may not be Visa products, Aufseeser notes.
With that possible loss of transactions in mind, it becomes less surprising that Visa would increase the interchange rate on some debit card transactions. And with banks struggling to become relevant again, they would set their own fees for debit card ownership, as already is occurring with Bank of America Corp., Aufseeser says.
“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 affectt all of the new technology in terms of how much it will cost and how it will fit into the use of debit cards, according to Riley.
“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 services to cover projected losses, Riley believes.
