More Increases in PIN-Based Interchange

  Credit cards and signature-based debit cards get most of the attention when the topic of conversation turns to interchange. But interchange rates set by personal identification number-based point-of-sale debit networks continue to rise, according to new market data from CCM sister publication ATM&Debit News.
  Most PIN-based debit networks have matched or exceeded the interchange cap applied to transactions initiated with Visa USA's Interlink cards. As such, the trend to increase rates that Interlink initiated two years ago continues, according to survey data published in June by ATM&Debit News.
  Montvale, N.J.-based NYCE, the nation's third-largest POS debit network after Star and Interlink, last month adopted a tiered rate system that sets a transaction fee cap of 65 cents-the highest standard rate among the POS debit networks. Both Star and Interlink, which also use tiered systems that lessen the interchange paid by high-volume merchants, cap their default fees at 45 cents per transaction.
  Merchant acquirers pay interchange to card issuers and pass along the cost to their merchant customers. The major networks' rate details are in the accompanying table (page 39).
  Most NYCE acquirers will pay 0.65% of a sale plus 10 cents. The new 65-cent cap represents a 63% increase from NYCE's former 40-cent cap. Nonsupermarkets with relatively high annual sales volume will pay less in interchange than lower-volume merchants.
  NYCE's standard supermarket rate is now a flat 24 cents, up 12% from 21.5 cents. For the first time, NYCE is establishing a mid-tier category for supermarkets, which presumably will enable more supermarkets to take advantage of volume discounts.
  Susan Zawodniak, NYCE executive director, says NYCE's new rates reflect what PIN-based transactions are worth to merchants, whose fees are not capped when transactions are initiated with signature-debit or credit cards. "PIN-based transactions are guaranteed, secure transactions," she says.
  NYCE's reconfigured rates follow a similar rate restructuring initiated in February by Star, the nation's largest PIN-debit network that was acquired earlier this year by Greenwood Village, Colo.-based First Data Corp. First Data also is the nation's largest merchant acquirer.
  Most Star acquirers as of Feb. 1 began paying 0.65% of the sale plus 12 cents, capped at 45 cents per transaction. Star previously assessed a 34-cent cap.
  Star's supermarket rate is now capped at 21 cents, though high-volume supermarkets pay less using a tiered system based on monthly Star transaction volume. For the first time, Star also created a tiered petroleum-merchant category with a maximum standard rate of 40 cents per transaction. Acquirers of quick-service restaurant transactions pay a flat 12.5 cents.
  MasterCard International's Maestro network in April matched Interlink's rates by increasing its fee cap 55% to 45 cents from 29 cents. Maestro also assesses a flat 22 cents for supermarkets and warehouse clubs. A MasterCard spokesperson would not discuss Maestro's fee policies.
  Meanwhile, the Accel/Exchange network owned by Fiserv Inc. also is closely following Interlink's rate structure. Accel/Exchange issuers receive 0.6% of the sale plus 10 cents, capped at 45 cents, from nonsupermarkets that had less than $10 billion in annual sales the previous year. Higher-volume merchants are assessed lower rates. The network's previous maximum fee was 31 cents. Accel/Exchange's maximum standard supermarket interchange fee is 19 cents, though high-volume merchants pay less.
  Unlike Star, which handles the greatest volume of PIN-based POS debit transactions, NYCE, Interlink and Accel/Exchange base their tiers on a merchant's overall sales volume, not network volume. That enables retailers to take advantage of volume discounts regardless of which network they use.
  "Many retailers have no choice which networks do the routing," says Zawodniak, noting that networks walk a "fine line" in trying to keep issuers and retailers happy.
  Interestingly, NYCE is suing Star over an alleged breach of contract regarding Star's priority routing rules. Those rules require merchants to use Star to switch transactions if the Star brand is on both the debit card and a payment terminal, even if an issuer has chosen another network as its preferred switch.
  Stan Paur, chief executive of the Houston-based Pulse EFT Association, the top financial institution-owned debit network, warns that interchange increases could cause a decline in overall network volume if merchants stop embracing PIN debit. Pulse, which uses a flat-fee interchange system, did not raise its rates over the past year.
  "This ever-escalating trend in PIN-POS fees is suicide because it will ultimately kill the PIN-debit product," says Paur, calling Interlink "an enabler" of the interchange rate increases because it for years assessed the highest fees among all PIN-debit networks.
  Interlink has in the past year become the preferred network over Star among several top-10 debit card issuers.
  The danger, says Paur, is that other, cheaper electronic forms of payment could supplant PIN debit as retailers seek ways to avoid increasingly higher transaction fees. Such a scenario also could harm issuers that enter into exclusive network commitments in which minimum transaction volumes are required, he says.
  Even relatively small networks, such as the Armed Forces Financial Network, feel the need to boost interchange to keep issuers happy. AFFN recently boosted its interchange cap by 29%, to 18 cents for nonsupermarkets, up from 14 cents previously. "We want to make sure our participants have the access they need," says Ann Morsch, AFFN senior account executive.
  The recent PIN-debit fee increases are coming after financial institutions lost tens of millions of dollars in revenue from lower signature-debit interchange that resulted from the successful retailer class-action lawsuit against Visa and MasterCard last year. Many banks, however, are reporting that their debit revenues are recovering in 2004.