The Interchange Poker Game

  The card associations have just finished a round of tit-for-tat that lowers signature-based debit interchange rates for big merchants but raises them for small retailers.
  When MasterCard International and Visa USA last spring agreed to pay more than $3 billion collectively to settle the merchant class-action lawsuit challenging their "honor-all-cards" rules, they also agreed to lower the interchange rates applied to their signature-based (offline) debit card products. Last Aug. 1, they did just that, lowering by about 30% the interchange rates applied to debit MasterCard and Visa check card purchases.
  Both card associations were obligated to assess the lower rates only through the end of 2003, after which individual merchants-mostly those large enough to exert some influence-could negotiate customized rates. Others, however, would have to settle with whatever standardized rates the card associations set.
  In December, MasterCard announced plans to raise debit MasterCard rates, effective April 4, so they matched Visa's settlement rates. Unbeknownst to MasterCard, though, Visa the very same day announced plans to raise its check card rates on Jan. 31.
  Now, MasterCard once again is adjusting its debit rates to match Visa's. In a January statement to its members, MasterCard said it is altering its original rate-change plan "to address the significant competitive challenge resulting from the substantial increases to debit interchange fees adopted recently by a major competitor." Visa is MasterCard's only competitor in the U.S. offline debit card market.
  In April, merchant acquirers of electronically authorized, in-store Merit III debit MasterCard purchases will pay card issuers using a multi-tier system identical to Visa's, but with lower minimum-transaction tiers. Tier I merchants handled at least 8.75 million debit MasterCard transactions in 2003; Tier II, 4.5 million; and Tier III, 1.5 million. Merchants under each category also must keep chargebacks within 0.018% of sales and fraud within 0.022% of sales.
  The Tier I retail rate will be 0.7% of the sale plus 15 cents, or 43 cents on a $40 purchase. The Tier II rate is 0.83% plus 15 cents, or 48.2 cents on a $40 buy. And the Tier III rate is 0.95% plus 15 cents, or 53 cents per $40 purchase.
  Merchants failing to meet the tier requirements will pay 1.05% plus 15 cents, or 57 cents on a $40 purchase. Supermarkets will pay the same tier and default rates, but their fees are capped at 35 cents per transaction.
  In December, MasterCard announced plans to assess debit MasterCard interchange at 1.23% of the sale-49.2 cents on a $40 purchase-while supermarkets would pay a flat 26 cents per transaction. Those are the same rates Visa began applying to check card sales last Aug. 1 as part of its settlement in the merchant class-action litigation led by Wal-Mart Stores Inc., the world's largest retailer.
  But Visa in December said it would alter the August rates on Jan. 31-and those latest rates are the ones MasterCard will match in April. Visa's three volume thresholds, however, are higher than MasterCard's: 35 million check card purchases between June 2002 and May 2003, 18 million and 6 million, respectively.
  MasterCard's Aug. 1 merchant-lawsuit settlement Merit III debit rates, which still are in place, are 0.97% of the sale plus 10 cents, or 48.8 cents on a $40 purchase, and a flat 29 cents per supermarket purchase. Before Aug. 1, the Merit III debit MasterCard rate was 1.4% plus 10 cents, or 66 cents on a $40 purchase. Supermarkets paid 1.2% of the sale, or 48 cents per $40.
  The pre-settlement Visa check card rate was 1.25% plus 10 cents, or 60 cents on a $40 purchase. Supermarkets paid a flat 40 cents.
  If all those rate changes are enough to make your eyes blur, other aspects of the settlements continue to produce dramatic aftershocks with clearly understood implications. Wal-Mart, claiming in December (before the last round of price changes) that MasterCard's offline debit rates were too high, stopped accepting debit MasterCard Feb. 1 ("Wal-Mart's Bull Eyes MasterCard," Card Watch, January). Merchants now have the right to reject offline debit while still taking bank credit cards, and Wal-Mart is the first retailer known to have exercised this right. Whether Wal-Mart eventually will be swayed by MasterCard's planned pricing revisions in April is unknown. Debit MasterCard accounts for less than 1% of Wal-Mart's sales.
  While MasterCard and Visa next month will assess virtually identical offline debit rates, pricing for their personal identification number-based (online) point-of-sale debit programs is dramatically different. Visa's Interlink is the second-largest POS network. MasterCard's Maestro network remains a relatively small industry player.
  Indeed, MasterCard only last year lifted a rule requiring issuers to use Maestro only if a regional network were not available to switch the transaction. In changing that rule, and increasing the interchange rates applied to Maestro purchases last July, MasterCard positioned Maestro to compete with the regional electronic funds transfer networks for issuers' PIN-based card business in stores.
  Prior to last July, Maestro issuers received just 9.5 cents in interchange. They now receive 0.5% of the sale plus 7 cents, from a minimum 11 cents to a 29-cent cap. The supermarket/warehouse rate is a flat 17 cents. The convenience-store rate is 0.75%, from a minimum 11 cents up to 25 cents.
  Visa, meanwhile, uses a tiered system for Interlink that rewards high-volume merchants. The default rate is 0.65% of the sale plus 12 cents, capped at 45 cents; supermarkets pay a flat 22 cents.
  However, acquirers of eligible nonsupermarkets with $38 billion or more in 2002 gross sales pay 0.45% of the sale plus 4 cents, capped at 22 cents while acquirers of eligible supermarkets with such sales pay a flat 16 cents. Acquirers of eligible nonsupermarkets with $10 billion to $37 billion in sales in 2003 pay 0.5% of the sale plus 5 cents, up to a maximum 22 cents, while the rate for supermarkets in that tier is 17 cents per transaction.