A Glimpse of Costs to Come

Visa Inc. and Mastercard Inc. have postponed their planned U.S. interchange revisions until July, but when these changes do take effect the net impact on merchants could be deep, according to an analysis released last month by CMSPi, an Atlanta-based global merchant payments consultancy.

Indeed, the new pricing planned by the two big payment networks will yield “the first significant increase in rates in more than a decade” in a number of important merchant categories, says Calum Godwin, the firm’s chief economist.  “This is really important for the U.S. payments industry.”

CMSPi’s analysis of the changes, which were originally scheduled to take effect in April but were put off by the networks in recognition of the coronavirus crisis, estimates that U.S. merchants in the aggregate will pay a net $80 million more in interchange on Visa cards over 12 months starting in July.

The net impact of Mastercard’s revisions, meanwhile, is estimated to be $383 million over the same year. CMSPi bases its total net cost estimates on 2019 volume figures.

Merchants will see disparate effects, however. Visa transactions at supermarket chains will carry rates 15 to 30 basis points lower than they are now, while the travel-and-entertainment and passenger-transport industries will get Mastercard rates about 15 basis points lower, according to CMSPi’s analysis, which figures these changes as weighted averages for each industry.

But some other industries, including online merchants, will see their Visa rates rise. Mastercard-accepting merchants in a wide swath of industries will incur rate increases of up to 15 basis points. Grocery-store rates will remain unchanged, but airline rates will go up 10 basis points, as will rates for general retail.

Fuel retailers, which are contending with an October deadline to install EMV technology at the pump, will see a 14-point increase. Again, CMSPi calculated these changes as weighted averages across each industry.

U.S. merchant acquirers typically pay card-interchange rates and then pass on the cost to their merchant clients, so how the networks’ new rate tables will ultimately translate to the cash register will vary by category and possibly by individual merchant. “These changes are incredibly complex,” Godwin says.

Another difficult variable is how deeply the economic impact of the Covid-19 pandemic will be felt over the coming months, particularly by small and medium-size merchants. Businesses that close will quite clearly not be processing transactions, and so will not be paying interchange. Others may stay open but struggle, a factor that could influence the card networks’ plans.

“Visa already made the decision not to implement interchange modifications in the U.S. planned for April,” says a statement released by Visa last month. “Further, we have made no decisions regarding what, if any, changes will be made in the future in recognition of the dramatically changed environment in which all businesses are operating today.”

The uncertainty surrounding the extent of the pandemic’s impact, though, is such that CMSPi did not feel it could factor it in to its analysis.

“Our models don’t account for small-merchant attrition, simply because it’s impossible to model at this stage,” Godwin says. “On one hand there’s shocking U.S. jobless data, but on the other hand there’s an absolutely massive fiscal stimulus coming, plus we don’t know how long the pandemic will last.”

Still, the uncertainty has led the firm to adjust its growth expectations for the U.S. economy. “What I will say is we normally bake in 5% year-on-year growth assumptions for future forecasts, but we’ve not done that here,” Godwin says. “We’ve applied a zero-percent growth forecast.”

For its part, Visa says it is evaluating the situation with respect to its planned shift of liability for fraud losses to fuel retailers that don’t adopt EMV by October, but for now is keeping the deadline in place.

“Visa recognizes the Covid-19 pandemic has caused unprecedented impact on the global economy and acknowledges the importance of fuel retailers in enabling daily transportation and commerce,” says a separate statement from Visa in April. “Visa will continue to closely monitor the situation through ongoing assessments and conversations with partners to comprehensively gauge the ability of the ecosystem to support fuel retailers with their upgrade. As such, the liability shift date remains the same as Visa works with partners and retailers to upgrade to EMV.”

Besides the changes now scheduled for July, CMSPi also looked at further rate revisions Visa is planning for October that, among other things, will do away with the cents-per-transaction part of the fee for restaurants but increase the percentage part, known as the ad valorum rate. Under this plan, rates will change across a wide array of industries, with reductions for very big merchants and increases for smaller ones.

The biggest beneficiaries will be large retailers and restaurant chains with an average ticket below $8.88, according to CMSPi. Small merchants and restaurant chains with average tickets above $8.88 will see cost increases. All told, CMSPi estimates these changes to yield a net annual cost increase of $268 million.

—John Stewart, with additional reporting by Kevin Woodward