Interchange
UNDERSTANDING APRIL 2003

INTERCHANGE UPDATES

   The newest interchange rates from Visa and MasterCard include increases in several different areas as well as some new interchange categories.The card issuers typically adjust the rates each April and October. Survey data from card association members is combined with the associations' own data to calculate costs, and adjustments are made accordingly. See the accompanying chart for a full list of the changes, almost all of which are increases.
   Some of the increases reflect new focuses for the card companies as they seek to take advantage of growth areas, according to industry experts. In these instances, the increased revenues will be passed along to issuing banks to encourage further promotions of debit and corporatecards as well as other growth opportunities.
   "Past practice has shown that incenting the issuer is a good way to promote products," says Les Reidl, Executive Vice President of Speer & Associates, Atlanta, Ga. Other increases reflect what the card companies consider to be a better reflection of the cost of doing business, Reidl adds.
   For some merchants, the new rates will mean little. For others, they could represent an increased cost of doing business. However, ISOs should look beyond the rates, according to Manny Ferrera, Vice President of Operations for Electronic Data Resources, West Palm Beach, Fla.
   The accompanying rate chart represents rates paid by the acquirer to the issuer. The acquirer charges the merchant a discount rate to cover the costs of providing deposit credit and handling the merchant's bankcard sales transactions.
   Most agents and ISOs don't have a true interchange pass through, they have a buy rate. With the increase in rates, the buy rates for ISOs will likely increase, Ferrera adds. As a result, EDR is adjusting its rates so that the most recently announced rate changes will be revenue-neutral for ISOs. Other processors may or may not make similar adjustments.
   Instead of focusing on rates themselves, ISOs should concentrate on offering merchants payment services, including gift cards, check processing, etc., Ferrera adds. Rates are only a small portion of the entire package the ISO can offer.
   Still, it's good to know the rates, particularly the changes, in order to handle merchants' questions about differences in the amounts they are paying. Though most merchants are unlikely to notice the differences, those who have higher percentages of debit and corporate card transactions may see some significant changes.
   With the recently released interchange rates, the real battle ground will be with debit cards, according to Richard Crone, Vice President for Dove Consulting, Boston, Mass. Citibank alone has some 2 million debit cards in circulation.
   While Visa kept its rates the same, MasterCard increased its rate from 1.38% plus 10 per transaction, to 1.4% plus 10 per transaction. So the interchange for a $40 transaction will increase from 65.2 to 66.
   "This will incent the industry to promote more use of the debit cards," Crone says. "All boats go up with a rising tide."
   The area where ISOs can take advantage of this emphasis on debit cards, according to Crone, is in recurring payments (e.g., monthly utility bills). ISOs have been relatively unsuccessful in this area in the past, but Crone suggests a different approach could be more successful.
   Rather than going in "the front door" and trying to sell the idea to a corporate official about accepting debit (and paying interchange), the ISO should try "the side door" available through a company's e-commerce department. Managers of these departments are looking for ways to maximize their returns on investments. Accepting recurring payments online is one way of doing this.
   Studies show it costs $1.50 or more to send out and collect on paper bills, several times the cost of billing and receiving payments electronically. The cost of interchange reflects a very good return on investment for these managers, Crone says. As evidence, Crone points to a recent advertisement by AT&T; in USA today urging customers to use Visa cards to pay their telephone bills.
   Crone recommends that ISOs study and educate their staffs about the recurring billing market. He further suggests that ISOs investigate partnering with billing service providers, like e-docs, that provide the platform for online account management.
   Another area in which the ISO might be able to benefit from the latest rate change, according to Reidl, is by providing a PIN pad to merchants to accept PIN-based debit transactions, which are less expensive (for the merchant) than signature-based debit transactions.
   Reidl points to the increase in corporate card rates as another significant change. Visa increased its commercial card standard rate 13 per $100, from 2.5% plus 10 per item, to 2.63%, plus 10 per item. The commercial card electronic rate rose 4 per $100, from 2.1%, plus 10 per item to 2.14%, plus 10 peritem.
   MasterCard increased rates in most of its categories of corporate cards, and added a new middle tier for corporate travel and entertainment charges. There used to be two tiers, now there are three.
   Corporate cards, though they may be considered less risky than cards held by individuals, are more expensive for the card associations due to the itemized reports provided to the cardholder at the end of the payment period or at the end of the year.
   Reidl adds that even smaller businesses are finding these itemized reports to be valuable as these firms attempt to get better control of their own expenses.
   There are other additional categories for Visa as well. The card issuers unveiled separate rates for electronic commerce (preferred) for hotel, auto rental and passenger transport charges.
   Each issuer increased their best credit card rates- CPS Retail-Credit for Visa and Merit III for MasterCard - for traditional retail merchants like department stores rose 2 per $100 transaction.
   Reidl called most other changes by the card issuing companies "minor adjustments". See the accompanying chart for a more detailed description of the rate changes.