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CoverStory

• Charitable and not-for-profit: Visa and Master-
card created interchange categories specific to
View from the brands charitable organizations, beginning in 2013 in the
United States and expanding to Canada in 2015.
Mastercard defines payment card interchange as "a small fee paid by a merchant's The new lower rates, meant to facilitate single do-
bank (acquirer) to a cardholder's bank (issuer) to compensate the issuer for the nations and monthly recurring pledge payments,
value and benefits that merchants receive when they accept electronic payments. have driven a torrent of card transactions originat-
It enables banks that issue electronic payments to deliver tremendous value to ing from organizations classified under MCC 8398
merchants, governments and consumers." and certain qualifying disaster-relief programs.
• Government and education: Visa and Mastercard
Visa describes interchange as transfer fees between acquiring and issuing banks
for Visa card transactions. "Visa uses these fees to balance and grow the payment have made several changes to their interchange
structures that encourage card acceptance from
system for the benefit of all participants," Visa's website stated. "Merchants do not
pay interchange reimbursement fees —merchants negotiate and pay a 'merchant government agencies and schools. A Visa initia-
tive called the Government and Higher Education
discount' to their financial institution that is typically calculated as a percentage per
transaction. Merchants can receive a variety of processing services from financial Payment Program includes special interchange
rates for governmental collections of taxes, fines,
institutions that may be included in their merchant discount rate."
court fees and other expenses. Similar rates apply
to card-based tuition payments at qualifying busi-
ness and trade schools.
card type (for example, corporate or consumer, credit or Mastercard established a convenience fee pro-
debit); channel (card present or card not present); method gram that encourages card acceptance at an array
of authorization (signature versus PIN); and card attributes of governmental and educational organizations.
(no frills versus rewards). Qualifying organizations are allowed to assess
convenience fees for Mastercard payments made
When Visa and Mastercard introduce new interchange in person, online, by phone, through the mail or at
categories, the rationale given is often the creation of kiosks. PIN-based debit card payments are not cov-
additional opportunities for growth. "Both merchants and ered, however. "These programs have significantly
acquirers benefit when emerging markets are added to increased revenue in government, educational and
the interchange chart," said Todd Ablowitz, President of charitable sectors, largely driven by technology
Double Diamond Group LLC. "Merchants and industries and convenience," Ablowitz said.
that have not achieved full market penetration can improve
their market presence and revenue streams. Small and Ongoing changes contribute to complexity
midsize acquirers can find new ways to differentiate by
specializing in these verticals." Legal wrangling, which led to Visa and Mastercard
transforming from bank-owned consortia to public
Over the years, Visa and Mastercard have adjusted companies, and technology advances also have brought
interchange to bring numerous new vertical markets about significant changes in interchange. The earliest
into the fold. Payment providers have responded by POS card terminals merely captured basic data about
demonstrating how accepting electronic payments can cardholders and issuing banks to facilitate processing
help these merchants increase average tickets, simplify (contained in Track 1 of a card's magnetic stripe).
back-office management and enhance operational
efficiencies, Ablowitz added. Advances in data capture and management and network
communications, along with countless other technological
Schools, governments and charitable organizations have innovations (low-cost miniaturized computing power, the
benefited from this go-to-market strategy. "In this mature Internet and mobile phones among them) have continually
and competitive industry, especially if you're not the enhanced the power, speed, reach and functionality of
biggest acquirer, new and emerging interchange categories POS devices. Upgrading terminals to read Track 2 data, for
can be a great resource and guide," Ablowitz said. "There example, allowed for the capturing of data that matched
are riches in niches; find your niche and make it happen." transactions to an expanding list of interchange rates,
A few examples follow: noted David Holman, Division Sales Director at Beyond
Inc.
• Signature debit: Before the 1990s, merchant accep-
tance of debit cards was scant and dominated by Many experts interviewed for this series suggested the
PIN-authorized ATM cards. Creating new inter- card brands, as well as some issuers, acquirers and ISOs,
change categories for signature debit encouraged bank on the complexity of interchange. Holman referenced
banks and credit unions to place Visa and Master- the proliferation of acquirer pricing models as evidence of
card logos on the ATM cards they issued, prompt- this. "The more creative they are the easier it becomes to
ing more merchants to accept debit cards and cus- charge more than you possibly should," he said.
tomers to use them like credit cards.

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