isa recently announced changes to many of its interchange rates, effective April 1, 2005 ("Visa 2005 Interchange Rates," The Green Sheet, Dec. 27, 2004, issue 04:12:02).

Although all acquirers pay the same interchange rates, not all merchants do. As part of Visa and MasterCard's strategies following the end of their Jan. 31, 2004 "settlement rate" (a result of their settlement in the class action lawsuit with Wal-Mart and other retailers), both Associations established lower rates for larger retail and supermarket businesses.

This move was significant because it marked the first time that an interchange differential would exist for larger merchants.

For Visa, the differential between the lowest and highest rate for Custom Payment Service (CPS) Retail Credit is a modest 11 basis points. The differential for CPS Retail Debit is a whopping 35 basis points!

Moreover, as acquirers, ISOs and merchant level salespeople (MLSs), the space we collectively serve is the smaller-end merchant; consequently we only encounter merchants in the highest interchange rate schedule. In order to meet the next lowest interchange schedule, a merchant would have to process approximately $50 million per month in Visa/MasterCard volume. Additionally, merchants must maintain certain chargeback thresholds.

Visa's new pricing schedule (effective in April) lowers the interchange rate for CPS Retail Debit categories.

However, the problem is that Visa only lowered the rate two basis points in the "All Other," or "Tier IV" smaller category (from 1.05% + $0.15 to 1.03% + $0.15). But the differential between the lowest rate and highest rate will increase to 41 basis points plus $0.02¹

Certainly, the large retailers brought about the "Wal-Mart suit," and they will benefit most from these changes. Despite the fact that less than a handful of merchants will qualify, the percentage of total transactions is enormous, which allows Visa to claim that it lowered interchange rates for signature debit by 13%.

Unfortunately, the signature debit interchange rates for our merchants will decrease by less than 2%.

Worse, along with the above announcement, Visa announced rate increases to its Interlink online debit brand. Though Interlink also has tiered rates, the network is increasing the rate applicable to our merchants by more than 11%.

The optimist in me sees this as an opportunity to sell online debit in the same pricing schematic as credit and offline debit (a discount plus a transaction fee).

The pessimist in me sees the business case for online debit vanishing. As the online debit rates rise and offline rates remain or decline, merchants lose the incentive to accept or begin accepting online debit.

Additionally, and in conjunction with the above changes in April, Visa announced increases to the electronic credit interchange by 16 basis points and standard credit by seven basis points. Stay tuned. I will address interchange again in an upcoming issue of The Green Sheet.

¹ Source: American Banker

Ken Musante is President of Humboldt Merchant Services. E-mail him at kmusante@hbms.com .