pring is here. Accompanying the rain showers and fragrant blossoms that tend to mark this time of year are interchange rate increases from Visa U.S.A. and MasterCard International. Although spring rate increases are now expected with the change of season, there's really more to it. And when merchants ask "Why?" make sure you have the answers.

The card Associations' latest rate schedules, effective April 2005, include many new complexities (see "Visa 2005 Interchange Fees," The Green Sheet, Dec. 27, 2004, issue 04:12:02, and "MasterCard U.S. Region 2005 - 2006 Interchange Programs and Rates," The Green Sheet, Feb. 28, 2005, issue 05:02:02).

Gone are the days of one interchange rate for retail transactions and one for keyed or Internet transactions. Interchange has evolved into a complex grid. Depending on card type, merchant category code (MCC), merchants' actions and card attributes, the interchange rate can vary by more than 1%.

My goal is to provide you with sufficient background on why the Associations have changed the rate schedule (again). As an ISO or merchant level salesperson (MLS), you should be informed so you can better explain any increases to merchants and prospects.

The genesis of the increases stems from lawsuits filed against Visa and MasterCard. The first, the so called Wal-Mart settlements, resulted in the Associations separating offline, or signature-based, debit from credit card transactions.

Without discussing the merits of each case (see "What Happened: $3 Billion Payout, Lower Fees, 'Honor All Cards' to Change" and "What It Means: Less Revenue, Bolder Merchants," by Patti Murphy, May 12, 2003, issue 03:05:01), the result is that offline debit interchange is now significantly less than credit.

Offline debit is an increasing segment of payment transactions. Prior to the settlements, Associations priced offline debit similarly to credit. As a result of the settlements, they had to increase credit interchange so not to have an adverse impact on the total interchange income to issuing banks.

Another lawsuit opened the door to Visa and MasterCard member banks to issue American Express Co. (AmEx)-branded (or any other bank card such as Discover Financial Services) cards. Again, without going into the details of the case (see "Supreme Court Decides Against Visa, MasterCard in Six-year Antitrust Suit," The Green Sheet, Oct. 25, 2004, issue 04:10:02), Visa and MasterCard must now allow member banks to issue AmEx, Discover or any other third-party-branded card.

The danger to us as ISOs/MLSs is that such actions will ultimately hurt our revenue as we earn less from AmEx and Discover transactions.

Issuing banks would choose to issue AmEx-branded cards because AmEx has a higher discount rate, thus banks can pay the issuers more interchange. In response to this, Visa and MasterCard have 1) increased credit interchange rates, and 2) emphasized their premium or rewards cards designed to serve more affluent cardholders and increased the interchange rates on those cards.

MasterCard's rewards card is the World Card and Visa's rewards card is the Signature Card. Visa even took the concept one step further and instituted a mid-level rewards card called Traditional Rewards for cards that cost more to issue (such as co-branded airline cards). However, Visa did not do this at the Signature Card level.

Despite the steep increase in MasterCard's Consumer Credit Merit III rate from 1.54% + $0.10 to $1.63% + $0.10, I think that this increase and the others are easier to adjust to because MasterCard made them to existing interchange categories. The most expensive rate is a whopping 2.90% + $0.10 for a World MasterCard Standard.

Visa's changes are more complex, however. Visa expects 18% of its consumer cards to fall under Traditional Rewards and another 19% to be Signature Cards. This means that for a given retail or keyed transaction, nine different rates could apply.

Merchants have no control over which card a consumer presents or the associated processor downgrades. Consequently, the fees can vary widely by card type. For example, Visa's Traditional Rewards is 11 basis points higher for a retail transaction and 36 basis points higher for a T&E transaction. Merchants might not have ways to validate the differences between these two cards.

If your head is spinning from the above information, imagine how merchants must feel. Try to be as clear, concise and patient as you can when explaining new interchange rates and the reasons behind them.

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