Visa Inc. is overhauling its pricing to spur merchants to route transactions its way and defend a dominant share of the U.S. debit card market, a position endangered by new regulations.
The payment network plans to lower an existing variable fee that merchants and their acquirers pay on each card transaction. To compensate, Visa will introduce a fixed “network participation” fee that merchants will have to pay to accept any of the network’s cards, debit or otherwise.
The dual approach “offers merchants an even greater incentive to route more transactions over our network by providing them an opportunity to lower their per-unit transaction costs and take advantage of economies of scale that are now more readily available to them,” Joseph Saunders, Visa’s chairman and chief executive, said during a July 27 earnings conference call.
Analysts’ questions about how the fee changes will work, what impact they will have on Visa’s bottom line and what type of savings retailers could see as a result dominated the call. The company’s executives refused to give specific details about the strategy, citing competitive pressures.
But it was clear that they believe the debit card market is Visa’s to lose.
The Federal Reserve Board last month finalized a rule implementing the so-called Durbin amendment to the Dodd-Frank Act that instructed the central bank to set debit interchange fees that are “reasonable and proportional” to issuers’ costs as well as give merchants greater ability to control how debit card transactions are processed.
One part of the rule bans arrangements that networks such as Visa have had with banks under which they exclusively process both an issuer’s signature and PIN-debit transactions. Under the new rule, issuers must equip their debit cards with at least two networks that are not affiliated with each other–Visa’s signature-debit network and First Data Corp.’s Star PIN-debit network, for example.
The intention is to give retailers a choice about which network to route their customers’ transactions in hopes of lowering costs. The expectation is Visa will lose a portion of its PIN-debit volume as a result.
Visa’s “got a lot of exclusive debit cards in the marketplace, more than anybody else. So they’re trying to protect their volume as much as possible,” says Jason Kupferberg, a senior analyst with Jefferies & Co.
The price changes will be mandatory for merchants. Asked whether retailers will be able to opt out of the new network fee, Saunders said no.
“They can opt out if they don’t want to accept Visa cards,” Saunders said.
Whether Visa’s pricing changes will be enough to entice merchants to continue routing over its network is unclear, but some analysts say the strategy, in theory, makes sense.
“It seems like a creative means of benefiting all … parties involved,” says Sanjay Sakhrani, an analyst with Keefe, Bruyette & Woods Inc.
But Brian Dodge, senior vice president of communications and state affairs for the Retail Industry Leaders Association, is skeptical merchants would see any cost savings.
“This is exhibit A in how Visa is able to leverage its market power to determine rates, fees and whatever they wish … to impose … on merchants,” Dodge says.
The idea that merchants will have any real routing choice is a fallacy because the Fed chose a less-onerous interpretation of the network-exclusivity rule, requiring only two unaffiliated networks on each card instead of two networks each for signature and PIN transactions, he says.
Tien-tsin Huang, an analyst with J.P. Morgan Securities, compares the price to a fixed annual golf membership fee plus variable cart and green fees.
The fixed annual network fee will be paid monthly by merchant acquirers, which will pass the fee through to their merchant clients, Huang wrote in a July 28 research note. “We expect the annual pricing grid to be complex and based on merchant size, number of outlets” and category.
At the same time, the variable processing costs that merchants pay will go down.
“This fixed fee … is not a fee that sits on top of what merchants are paying,” Saunders said. “It is part of what we consider to be a reduction in the fees that merchants will pay.”
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