Why Acquirers May Not Rejoice Over the Interchange Rate Freeze

The freeze in U.S. bank card interchange rates, confirmed Wednesday by Visa Inc. for its network and last week by MasterCard Inc., is obviously good news for merchants and not-so-great news for credit and debit card issuers. But, somewhat surprisingly, it may not be all that welcome by merchant acquirers and independent sales organizations.

The networks set interchange rates, and for any given sale the resulting per-transaction fee is charged to the acquirer and paid to the issuer. Acquirers and ISOs simply pass the charge on to their merchant client. Visa and MasterCard typically adjust their interchange schedules in April and October, and with no changes by either network this spring, merchants can be fairly certain their acceptance costs will remain stable. Issuers, however, cannot expect any increase in revenues beyond what comes from higher charge volumes.

The picture for acquirers and ISOs is not so clear-cut. Acquirers typically support their merchants’ efforts to lower interchange expenses since interchange can easily amount to 75% or more of card-acceptance costs. But they often time increases in prices for their own processing services with interchange rate increases. With no interchange increases this spring following stable rates last year, raising discount rates will be difficult for acquirers, according to Greg Cohen, president of Moneris Solutions Inc., a big acquirer based in Schaumburg, Ill. “Folks have not had that opportunity for a year and a half or so,” says Cohen.

Acquirers aren’t just hiding behind the networks in order to pad their profit margins, according to Cohen. Over time, portfolios shrink when merchants switch processors or go out of business, which requires acquirers and ISOs to constantly troll for new business just to stay even. Or, acquirers cut deals with price-sensitive merchants in order to keep their business. Interchange increases are a convenient time to adjust pricing in order to restore some of that eroded profitability. “Often you have to have that portfolio lift in order to maintain your portfolio margin,” says Cohen. He adds, however, that the profit squeeze is being mitigated by a healthy increase in charge volume in recent months.

Visa and MasterCard in years past sometimes have held the line on interchange increases or imposed only minor ones. But pricing this year is an extremely hot political potato because of the Dodd-Frank financial reform law’s so-called Durbin Amendment that calls for the Federal Reserve to impose debit card interchange regulations on issuers with more than $10 billion in assets. The Fed’s preliminary proposal calls for cuts of 70% or more in average interchange revenues; final rules are expected some time before July 21.

While neither Visa nor MasterCard explained to Digital Transactions News the reasons behind their latest interchange schedules, with the Fed’s job unfinished, their options clearly were limited. Any increase, especially in debit, obviously would arouse strong opposition from merchants and the Durbin Amendment’s supporters on Capitol Hill. But as one industry analyst said last week, a decrease could be interpreted as an admission that current rates are too high. Lowering rates might undercut efforts in Congress to delay the Fed’s regulations for up to two years.

The networks did make some changes in pricing and operational procedures apart from domestic interchange. They’re raising some premium card interchange rates on inter-regional transactions. MasterCard raised its network assessment on transactions of $1,000 or more by 1 basis point, from 0.11% to 0.12%. And Visa is giving card issuers the option to forgo obtaining a cardholder’s written signature in a chargeback dispute and instead submit the required documentation electronically. While that rule change promises to take paper out of the costly and time-consuming chargeback-resolution process, it also might make it easier for dishonest individuals to dispute charges, according to Cohen. “Time will tell,” he says.

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