After leaving interchange rates mostly unchanged for the past decade, Visa sent a letter to partner banks outlining the coming changes to swipe fees that will roll out in two phases beginning in April then October this year. While high volume supermarkets as well as those with education and real estate merchant category codes (MCCs) will see a decline, eCommerce retailers will see base interchange rates increase from 1.90 to 1.99 percent on standard Visa rewards cards and from 2.5 to 2.6 percent on premium rewards cards for a $100 transaction.
An acquiring or issuing bank shared the letter from Visa with Bloomberg News who was the first to report this story. This was quickly picked up by other news outlets generating response from merchants and trade groups. The Retail Industry Leaders Association (RILA) issued an official statement the same day the story broke, saying that Visa claiming “rates will go down for ‘some’ is masking the true impetus for this plan,” which is to “hike rates on the vast majority of merchants.”
Quoted from their letter to banks, Visa was somewhat unapologetic in its forewarning that interchange rates will be changed. Visa justified the decision first stating how the “U.S. credit card interchange structure has been largely unchanged for the past 10 years,” before going on to say default US interchange rates will be adjusted to “optimize acceptance and usage and reflect the current value of Visa products.”
“Optimizing acceptance and usage” likely refers to the industries that will see lower rates, while the statement about “reflect[ing] the current value of Visa products” is likely referring to CNP channel merchants who will see an increase in swipe fees of about 4 percent. Many merchants and representative trade associations interpreted this statement as Visa flexing their duopolistic muscles.
U.S. retailers paid nearly $108 billion in interchange fees in 2018 up from $96.7 billion the year prior and $64.6 billion in 2010, according to data from the Nilson Report. These rising figures are representative of increasing payment card transactions each year as well growing use of premium versus standard rewards payment cards.
The new interchange rate schedule will begin to take effect in April allowing for some trial-and-error and time for processors to implement changes before finalizing the updated interchange fees by October 2020. MasterCard has not commented or announced interchange updates of their own, but a similar change is widely expected among merchants and payment industry experts.
Card associations and banks have often said there is higher risk and therefore higher costs to transacting in the Card Not Present channel. While merchants typically incur the liability of a fraud loss and issuers bear the operational costs with processing more disputes, the card associations merely provide the rails that facilitate the exchange of information between parties. This isn’t to say they bear no cost, but the cost of CNP channel fraud is likely more impactful to merchants and issuers than so the card associations.
Lowering the published interchange rates for high-volume supermarkets is also interesting. A $50 transaction from one of these grocery stores will soon incur a 77 cent interchange fee, down 33 percent from $1.15 today. To some, this could be seen as an olive branch or move of acquiescence on Visa’s part, which has had contentious disputes with major retailers like Kroger and Walmart. This included antitrust allegations from Walmart, undisclosed settlements related to debit card routing suits from Kroger and Walmart as well as Kroger boycotting Visa at 271 (out of over 2,800) stores they operate.
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