Pulse Turns to Tiers

  Pulse, which once prided itself as being the largest financial institution-owned electronic funds transfer network, earlier this year was acquired by Morgan Stanley's Discover Financial Services unit, joining other leading networks bought by public companies in recent years.
  Now Pulse, which had avoided another network direction of late-tiered interchange rates-is joining that trend as well.
  Tiered interchange-rate policies, which have become the norm among the largest EFT networks, apply lower rates to large merchants and higher ones to smaller retailers. Acquiring banks pay card issuers interchange and pass the expense along to their merchant customers in their discount rates.
  Networks are adopting tiered rate structures to secure higher interchange revenues for their member issuers while easing the inherent financial burdens high flat rates could impose on high-volume retailers. Some observers say Pulse's move to a tiered rate structure, which took effect June 1, is designed to make the network more merchant friendly at a time when the use of PIN-debit cards is growing. More merchants also are promoting PIN debit as a lower-cost alternative to signature-debit and credit card transactions.
  Pulse's interchange rate previously was a flat 18 cents per transaction, a fee paid by all merchants regardless of volume or type. Under Pulse's new rate structure, nonsupermarkets with fewer than 500,000 monthly transactions now pay 36 cents for a typical $40 purchase. The minimum payment for the tier is 10 cents; the maximum is 65 cents per transaction. Supermarkets in this volume tier pay a flat 21 cents per transaction.
  Nonsupermarket retailers with 500,001 to 2 million monthly transactions will pay 30 cents for a $40 sale. The minimum payment for the tier is 10 cents; the maximum payment is 60 cents. Supermarkets in this tier will pay a flat 17 cents per transaction.
  Merchants with 2 million to 5 million monthly transactions pay 25 cents for a $40 purchase. The minimum payment for the tier is 6 cents, and the maximum payment is 50 cents. The supermarket rate for the tier is a flat 17 cents.
  High-volume merchants with more than 5 million monthly transactions pay 25 cents per $40 purchase. The minimum payment for the tier is 6 cents; the maximum payment is 45 cents. The supermarket rate for the tier is a flat 13 cents per transaction.
  Pulse's changes will make the use of the network more competitive at a time when consumers increasingly are using PIN-debit cards, says Cindy Ballard, Pulse vice president. "We are responding to competitive pressures," she says. "The market has made our flat-fee structure less in demand."
  By comparison, First Data Corp.'s Star, the nation's largest EFT network, sets a rate of 0.65% of the sale plus 12 cents, capped at 45 cents per transaction, for nonsupermarket acquirers with less than 5 million monthly Star transactions. Merchants not in a special retail category with 5 million to 15 million monthly Star transactions pay 0.6% plus 5?, capped at 35?, while those with 15 million or more monthly Star transactions pay 0.55% of the sale plus 4?, capped at 30?.
  Star's supermarket rates are a flat 21? for merchants with less than 5 million monthly Star transactions, 17? for merchants with 5 million to 15 million monthly Star transactions and 15? for merchants with at least 15 million monthly Star transactions. Star also has separate rates for petroleum merchants and fast-food restaurants.
  Montvale, N.J.-based NYCE, which is owned by Metavante Corp., sets as its rate for smaller merchants 0.65% of the sale plus 10?, capped at 65?. Nonsupermarket acquirers with at least $15 billion in overall annual sales pay 0.5% of the sale plus 6? capped at 45?.
  NYCE's standard supermarket rate is a flat 24? per transaction. However, an acquirer for a supermarket chain with annual gross domestic sales of $5 billion to $10 billion pays a maximum 22? per transaction, while an acquirer for a supermarket with at least $10 billion in gross annual sales pays a flat 17.5? per transaction.
  Visa USA's Interlink PIN-based POS debit network sets as its rate for smaller nonsupermarkets 0.65% of the sale plus 12?, capped at 45?. Supermarket acquirers pay a flat 22? per transaction.
  However, acquirers of eligible nonsupermarket merchants with $38 billion or more in 2003 gross sales pay 0.45% of the sale plus 4?, capped at 22?, while acquirers of eligible supermarkets with such sales pay a flat 16? per transaction. Acquirers of eligible nonsupermarkets with $10 billion to $37 billion in sales last year pay 0.5% of the sale plus 5?, up to a maximum 22?. The rate for supermarkets in that tier is 17? per transaction.
  The adoption of tiered rates is a reflection of a desire by Pulse's new owner, Discover Financial Services, to become more competitive among merchants for debit transactions, says Gary Jewell, senior vice president at Carrollton Bank, a Baltimore-based acquirer of PIN-debit purchases. "Discover wants to make them a player."
  Ballard, however, says Pulse planned to adopt a tiered-rate structure before the Discover deal. Although its 4,100 financial-institution members, many of which are community banks and credit unions, no longer own Pulse, the network wants to remain focused on its issuers, Ballard says.
  Merchants also pay Pulse from one cent to 6 cents in switch fees per transaction, depending on volume. Issuers pay no Pulse switch fees. Pulse's switch-fee rates will not change in June, says Ballard. Star and NYCE charge switch fees to merchants and issuers.
  The rate changes will result in an average interchange revenue increase for Pulse issuers of about 20%, Ballard says.
  Merchant Strategy
  By discarding its flat 18 cents per transaction rate, Pulse risks offending huge merchants such as Wal-Mart Stores Inc. that pay less than 18 cents transactions with Star, Interlink or NYCE.
  Indeed, Pulse appears to be tailoring its new rates to attract use by mid-sized merchants instead of large retailers, as NYCE, Interlink and Star seem to be doing with their rate structures, says Tim Sloane, debit director for the Waltham, Mass.-based Mercator Advisory Group.
  For example, Pulse's new rate structure has four nonsupermarket merchant categories, with those retailers with more than 500,000 monthly transactions paying the highest rate. Star's nonsupermarket rate structure has three categories, with retailers generating less than 5 million monthly Star transactions paying the highest rate.
  Although the use of PIN-debit is quickly growing, networks are not guaranteed ever-increasing switch volumes, and tiered pricing is a good way for networks to distinguish themselves from competitors, says Sloane. "You have to segment the debit market much more carefully than you used to," he says.
  Pulse is the fourth-largest PIN-debit network in terms of combined ATM and PIN-based POS volume, according to the 2005 edition of the ATM&Debit News EFT Data Book.
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