Star Gets Set to Slash Interchange for Small-Ticket Sales

The nation's largest electronic funds transfer network is rejiggering its interchange pricing in an effort to penetrate new merchant categories and convert more low-value transactions?in some cases, below $10?to PIN debit. As part of a sweeping set of pricing changes to go into effect May 1, Star Networks Inc. is chopping interchange for a wide range of merchants where low-ticket cash transactions predominate, from quick-service outlets to laundromats, car washes, and movie theaters. At the same time, the network is raising interchange for so-called PIN-less bill-payment transactions but allowing new billers to pay the current rate. To offset these changes, Star is raising its cap for higher-value tickets and rolling out a uniform national switch fee that will cut transaction costs for about 2,000 of its 6,200 member banks. The new pricing, which Star has begun communicating to members, merchants, and acquirers, is part of a major push by the network into the small-ticket market. Indeed, Star is creating a new merchant category, called small ticket, with interchange pricing intended to encourage installation of PIN pads and conversion of payments to PIN debit. The new category embraces a wide range of cash-dependent merchants, including commuter-transit agencies, parking lots, news dealers, quick-copy stores, and corner butcher shops. Starting May 1, these merchants will pay Star issuers 1.25% plus 4 cents per transaction for all tickets up to $10. Currently, they pay 0.65% plus 12 cents, with a 45-cent cap, and will continue to pay this rate for tickets over $10. This change will cut their interchange by a nickel on a $5 sale, from 15.25 cents currently. Star is hoping the reduction in the fixed-fee part of the interchange will encourage more merchants to install PIN pads. “Merchants indicated the [current] interchange fee was fine when people spent $20 or $30, but we were dis-incenting them under $10,” says Beth Lynn, senior vice president of network administration for Star, a unit of First Data Corp. “The fixed amount was large. These merchants have average tickets in the $6 to $7 range, and a fixed amount of 12 cents didn't make sense.” For fast-food outlets, Star is scrapping its flat per-transaction interchange fee of 12.5 cents in favor of a rate of 1.25% plus 2 cents, with a cap of 45 cents. This will chop the fee on a $5 ticket to 8.25 cents. With most cash tickets concentrated under $10, Lynn says, fast-food chains had trouble justifying PIN debit at 12.5 cents. “They can accept paying a basis-point interchange rate rate as long as the fixed amount is relatively low,” says Lynn. “By taking it down to 2 cents, it really eliminates the barrier at the low end where most transactions are.” Star, which processes about 4 million quick-serve transactions monthly, says 62% of the traffic it sees are tickets under $10; some 79%, it says, are under $15. Beyond these changes, Star will roll out new pricing for Internet bill payments using Star cards but not a PIN. Current billers, mostly utilities, will pay a new, higher rate of 0.65% plus 12 cents, capped at 45 cents; so-called emerging billers, such as insurers, educational institutions, and secured lenders, will pay the existing rate, 0.60% plus 12 cents, with a 35-cent cap. To go after cash co-payments at medical offices, meanwhile, Star is cutting interchange to 1.20% plus 4 cents for payments up to $15. Above that, the current rate of 0.65% plus 12 cents will apply. Offsetting these changes is an increase in the interchange limit for larger-ticket merchants, such as department stores and home-improvement outlets. These merchants will see the cap on their fee rise to 60 cents from the current 45 cents. These transactions typically fall into the $51 to $74 range, Lynn says. And, in a bid to cut costs for some of its member banks, the network is imposing a uniform switch fee of 3.25 cents nationally. Currently, in the northeast part of the country, Star members pay anywhere from 2 cents to 4.5 cents. The change, says Lynn, will save these members an average of 1.25 cents per transaction. The 3.25-cent fee is Star's standard fee elsewhere in the U.S.