A Visa, Mastercard interchange hike could inflame fee war

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Visa and Mastercard plan to raise interchange while battles over those rates and other levies such as merchant surcharging rage on, setting the stage for extra merchant expense, consumer costs and even more squabbling.

The card brands have not formally announced fee increases, though The Wall Street Journal reports Visa and Mastercard in April will raise interchange fees for processing card payments, citing anonymous sources. Though it is not known what type of transactions and which fees are being targeted for a potential increase, the networks generally schedule pricing or rules changes in an April and October cycle.

U.S. merchants have waged war against the card brands regarding fees, engaging in decades-long squabbles and antitrust legal tussles over how interchange fees are applied and how various network rules affect retail businesses.
It has resulted in significant settlement offers of billions of dollars that merchants often have backed away from. The merchants partly feel the settlement's not enough and had disdain for a provision in the settlement that that the merchants could not sue the card brands in the future if they accepted the payout.

Since this legal tussle is still unsettled, the timing of any increase in interchange rates affect every merchant and, ultimately, their customers.

Any fee hike will complicate merchant surcharging, or extra costs merchants impose for using cards over cash or other methods. Increasingly, states that had not allowed surcharging are dropping that restriction in giving merchants the ability to charge extra for accepting card payments as long as such a process is clearly described and posted within a store.

"What is really going to amplify this issue on the consumer basis is the number of states allowing surcharging now," said Brian Riley, director of card services for Mercator Advisory Group. "I think it is really going to exacerbate the problem because consumers will get it [any rate hikes] passed directly to them, whereas in the past it was just in the general fund of pricing."

This sort of scenario is why, at least in part, the merchants consider potential interchange rate increases as much larger than the fees for a basic transaction, Riley added.

"They are looking at fees that could be added on to it, like statement fees or risk management fees," Riley said. "What we see in looking at a baseline number on interchange is just the tip of the iceberg on this sort of thing."

It is especially difficult on smaller merchants who operate through a merchant processor, as opposed to the major retailers who get special rates or processing setups, Riley said.

The card brands and Merchant Advisory Group did not respond to inquiries prior to deadline.

Analysts at Keefe, Bruyette & Woods sent statements to media outlets early Friday, saying that interchange increases at this time were consistent with Visa's comments during its most recent earnings call regarding price changes in the second half of 2019. Mastercard's three-year guidance also includes some minimal impact from pricing, the analyst said in a research note.

"Discover is also planning on increasing interchange for rewards credit cards used to shop at restaurants and when certain Discover cards are used for online shopping," the analysts' note said.

But the analysts still said it's an odd time for an interchange hike, considering the legal battles.

"It’s been a while since KBW analysts have seen interchange increases from the networks and what is interesting, is the fact that the networks are choosing to make the changes now while in the late stages of the merchant litigation settlement," the note acknowledged.

While this appears a typical course of action by the networks, note that the largest merchants will likely not be impacted by these changes, given negotiated pricing with the networks, the KBW note said. "For Visa, the indicated fee changes seem consistent with company’s comments and KBW analysts estimate contribution in the low single-digits range on both the top and bottom-line, all else equal."

The leak about pending fee increases comes at roughly the same time the major card networks have worked with the European Union to lower rates in Europe, a longtime battleground for such fees.

Currently, U.S. interchange rates sit at about 175 basis points, or 1.75 percent on a transaction, while Europe is at about 42 basis points and Canada could see its rate in as low as the 60 basis points range in the coming years.

Last year, Visa and Mastercard agreed to cut interchange fees in Canada by 10 basis points to 1.4 percent on cards — a rate that takes effect in 2020 and would be in place for five years.

On the other extreme of the interchange fee question, the Australian government has been reviewing proposals that would effectively abolish interchange in that country. It continues a process that began in 2003 when the Reserve Bank of Australia implemented interchange reform that cut Visa and Mastercard's rates by about 50 percent, from its previous 0.95 percent rate.

Because of the complexities of the interchange fee structure in the U.S., it has long been argued that most merchants don't understand it. They generally just believe them to be too costly.

Such uncertainty opened the door for the Durbin Amendment legislation eight years ago to cap debit card fees.

The same holds true for merchant understanding of network rules, especially how they applied to the EMV liability shift in October 2015 and other transaction processing factors.

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