By Patti Murphy
Following what was publicly portrayed as a two-year hiatus, Mastercard and Visa adjusted interchange pricing effective this month. The new rates, both higher and lower, take effect amid renewed interest in Washington over the inner workings of the leading card networks.
Rohit Chopra, director of the Consumer Financial Protection Bureau, said publicly that he's troubled by the rate hikes and hinted that federal regulators and antitrust lawyers may take a closer look at how the card brands set rates.
And in a related development, several states want to outlaw interchange assessments on the tax portion of card transactions.
Visa and Mastercard typically revise interchange tables twice a year—in April and October. But both companies shelved planned rate hikes in 2020 and 2021, citing business disruptions brought on by the COVID-19 pandemic. But they did make adjustments.
"I have a front row seat, and I definitely saw changes last fall," said James Shepherd, CEO of ISO Amp, a leading statement analysis tool. His analyses revealed "some reductions in card-present interchange rates and some increases in card-not-present rates."
Some of the biggest changes were in the way transactions are categorized, especially for restaurants, said Kyle Morgan, CEO at MPI Processing. "Essentially, almost all cards are now downgrading to Restaurant 2 interchange whereas it used to be that 80 percent were Restaurant 1," Morgan said. "So, while the actual interchange on these two categories did not change, the effective rate for these merchants increased due to qualifications."
The merchant consultancy CMSPI estimated that Visa's 2021 changes worked out to $697 million in additional interchange fees last year. Visa's latest round of increases will impose an additional $145 million in fees, the consultancy said.
The changes that took hold this month primarily affect consumer credit card transactions, with the bulk of increases borne by larger merchants accepting premium cards.
Visa interchange on card-not-present transactions is increasing by between nine and 10 basis points; non-qualified (downgraded) transaction fees are up 45 basis points, according to a CMSPI analysis. Mastercard interchange fees for most in-store transactions are up between seven and 13 basis points; interchange fees on most online transactions are up by between six and 15 basis points. Small and midsize supermarkets are paying between 12 basis points and 20 basis points more on credit transactions, and airlines are paying a whopping 25 basis points more, CMSPI said. Convenience stores are also paying more in interchange when accepting Mastercard credit card transactions.
In addition to interchange adjustments, Mastercard also revealed changes to its digital enablement fee, which applies to all online spend. In the past, the fee was assessed only when a sale was completed. Now, the company is assessing the fee on all authorization requests, meaning it's being applied even when no final sale is made, for example, in cases when the transaction is declined or when a customer cancels the purchase prior to shipment.
Mastercard also doubled its digital enablement fee, from one basis point to two basis points, and it now imposes a minimum charge of 2 cents per transaction. CMSPI said its analysis shows online merchants selling items under $100 will be hardest hit by the minimum charge. Taken together the Mastercard fee hikes will cost merchants about $330 million, according to CMPSI. Relief for hard-hit merchants
Both Mastercard and Visa are offering some relief for smaller merchants, especially those hard hit by economic turbulence brought on by the pandemic. Visa made headlines in March when it disclosed plans to slash interchange rates by 10 percent for online and in-person transactions at merchants with $250,000, or less, in credit card transactions.
Mastercard told The Green Sheet in an email that the company reduced interchange for all merchants with card transactions under $5, as well as for "hotels, casual dining, daycare facilities and other hard-hit categories now in recovery mode."
Mastercard also is taking steps to help fuel merchants, the company's spokesman said. It increased pre-authorization levels for automated fuel dispensers, from $125 to $175 for consumer cards and from $350 to $500 for commercial cards. "This will be complemented by additional fraud and monitoring efforts to support fuel merchants during this time," the spokesman added.
"At least for now, they [the card brands] seem like they are taking a sensible approach, where premium card products will be charged higher, and large merchants, that, incidentally, have the loudest voice in the industry, will take the brunt of the costs," said Simas Simanauskas, partnerships director at ConnectPay.
Simanauskas suggested that as interchange rises, some merchants may look to bypass the card networks with lower cost alternatives, like account-to-account (A2A) and digital wallet payments. But not to the exclusion of card acceptance.
The two leading A2A platforms, Zelle and Venmo, both reported huge increases in consumer-to-business payments in 2021. Zelle, for example, reported that payments received by small businesses increased 162 percent over 2020. Venmo, which is owned by PayPal, claimed over 2 million merchants are using that network to collect payments.
"For merchants, offering a payment method that allows a buyer to purchase a product is paramount, and even if it costs more, a sale that costs higher is better than no sale at all if buyers do not find a recognizable payment method," Simanauskas said. "Thus, it is highly unlikely [alternative payment methods] will attract more attention now that processing fees reached new heights; however, it will not push the cards out entirely, as no one wants to miss out on potential customers."
"It's too early to tell what effect these [alternative] schemes will have," said Don Apgar, director of the merchant acquiring practice at Mercator Advisory Services. "What merchants want may not be what consumers want." For example, as alternative schemes move to real-time payment rails, consumers may not be willing to sacrifice the dispute resolution rights that apply to card payments, he said.
Washington's chief consumer watchdog, CFPB chief Chopra, made it clear that he has issues with how interchange is set, generally, and the latest increases in particular. "At a time of inflation, that just seems like adding insult to injury for many small businesses," he said in an interview broadcast by CNBC in early March. "I don't think we have a competitive payment system in this country," he added. "When prices rise in tandem at dominant firms, that always raises red flags for regulators."
Both the Federal Trade Commission and the Department of Justice, which share enforcement powers for antitrust matters involving consumer payments, are investigating Mastercard and Visa. Those investigations came in response to allegations that the two companies block retailers from processing debit card transactions through less expensive regional ATM/POS networks.
Senator Dick Durbin, D-Ill, whose public jawboning is largely credited with getting Visa and Mastercard to shelve planned rate hikes in 2020 and 2021, has been noticeably absent from public discussions of interchange rate setting this year. But that hasn't stopped merchants from trying to gain the attention of power brokers in Washington.
Leon Buck, vice president for government affairs at the National Retail Federation, called out what he described as a "lack of competition" and "price fixing" in card payments in a recent opinion piece published by The Hill, a website popular with Washington insiders. "[I]t's been a dozen years since Congress last took action, and then only on debit cards," he wrote, referring to the Durbin Amendment to the 2010 Dodd-Frank Act. In that time, Buck asserted, "swipe fees soared 70 percent, reaching $110.3 billion in 2020 when debit cards are included."
The Mastercard spokesman countered this claim by noting that more merchants are accepting cards for more payments than was the case 10 years ago, or even three years ago. "Electronic payments have proven even more valuable since the start of the pandemic," he wrote. "And that's why we're seeing merchants encouraging their customers to use electronic forms of payment." Buck suggested merchants appreciate that credit and debit cards offer "a safe, convenient experience and a guaranteed payment."
Apgar said complaints about card fees from merchants and their lobbyists may be misplaced. A lot of the added costs merchants experience come from processor fees, not interchange, he said. Plus, most ISOs and agents have built their businesses by promising merchants they can save them money on processing costs. "There's a lot of emotion out there," Apgar said. "And the way ISOs and agents sell feeds into that emotion."
Despite ongoing issues and perceptions around interchange, most experts agree interchange legislation isn't in the cards for Congress, at least not in the current session. In fact, when Scott Talbott, ETA senior vice president of government affairs, spoke on the regulatory and legislative outlook at this year's NEAA conference, the topic of interchange never came up.
This is not the case in the states. Lawmakers in at least six states have introduced bills that would prohibit payment processing companies from assessing interchange and other processing fees on the tax portion of card payments. The six states are Colorado, Idaho, Illinois, Indiana, Tennessee and Wisconsin. Similar legislation was voted down by the Virginia legislature last year. 
Patti Murphy is senior editor at The Green Sheet and self-described payments maven of the fourth estate. Follow her on Twitter The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.
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