By Ken Musante
Humboldt Merchant Services
We have all read the articles. Interchange and the issuing banks that benefit from interchange hikes are under assault from merchants and merchant groups concerned about the impact of increased interchange. The U.S. Congress is considering laws to regulate interchange.
Given the precarious financial position of most banks, I do not believe such laws will pass anytime soon, but the threat is real.
For their part, Visa Inc. and Master Card Worldwide made incremental changes to interchange, but the net result was only a greater diversity of higher-cost commercial and affluent interchange categories; there was minimal impact to overall interchange costs.
However, the latest news from the major card brands is interesting, because during this time of extreme turmoil within the banking sector and given the enormous credit chargeoffs, Visa and MasterCard might have used the economic climate as cover for increasing interchange. Interchange was intended partly as a way to reimburse issuers for credit losses.
Instead, because of the corporate changes at Visa and MasterCard and their need to drive revenue, they did something far more self-serving during this very difficult economic cycle: They increased their own fees.
As a reminder, interchange is paid by the acquirer to the issuer. It is reversed for cash advances, chargebacks, returns and ATM transactions. Visa and MasterCard get zero from these fees. Assessments and network access fees, on the other hand, are paid to and are for Visa and MasterCard.
MasterCard's assessments are 9.50 basis points, and Visa's are 9.25 basis points (of gross processing volume). Both had customary and long-standing acquirer network fees at $0.005 per authorization.
Other additional and lesser fees were also assessed but, other than the cross-border fees, the additional fees were minimal in comparison.
For example, Visa's Merchant Direct Exchange Connection fee ranges from a high of $0.0045 per transaction to a low of $0.0015, based on the number of transactions.
Visa also has a Risk Identification fee of $0.001 per transaction. Again these fees are minimal in comparison to access fees and have been stable through the years.
Consequently, I was perplexed at the magnitude of the increases handed down by Visa and MasterCard. These fees came at a particularly vulnerable time for their banking constituents. After all, if the payment infrastructure could support greater fees, why not increase interchange, which would benefit the institutions bearing the brunt of our economic collapse?
This is not an argument for increasing interchange, merely an expression of shock that the two card brands chose this time to increase their network access fees.
Certainly Visa and MasterCard are not alone in their desire to maximize profits. Many acquirers have done likewise and used interchange increases to bolster their own profits in turn but, again, the magnitude of the increases is worth pointing out.
In April, MasterCard eliminated its access fee of $0.005 and implemented a new network access and brand usage fee of $0.0185 - nearly four times the original fee.
In July, Visa is eliminating its fee of $0.005 per transaction and implementing a fee of $0.0195 per authorization. Visa is also adding the following:
I understand the rationale for some of these new fees. While I may not agree with the two Visa fees I just noted, they will drive merchant behavior and lessen the number of nonmatched authorizations and chargebacks from nonauthorized transactions.
Regardless of my concern over the timing, these fees are being implemented. I could rant against the hubris of these fees or the amount of the increase. My rant, however, would not change their implementation or existence. So what can you do? Here are two suggestions:
To maximize your income and assist your merchants in understanding the coming increases, be aware of these fees, their amounts and the way in which they are being applied so that you can explain them to your clients' satisfaction.
Ken Musante is Executive Vice President and Chief Sales Officer of Moneris Solutions. Contact him by e-mail at email@example.com or by phone at 707-269-3200.
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