Blog January 3rd 2023

Merchant Initiated Transactions: Pulling Payments to a New Frontier

According to the Subscription Economy Index, a report by Zuora, the subscription economy grew by over 435% in the last decade. Today, your grocery list, music library, movie night, and even the heated seats in your car can be bought through a subscription.

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Christian Johnson

Senior Manager, Global Advocacy Manager

The growth is unlikely to stop, as subscriptions are giving consumers much-needed flexibility in their payments and retailers are enjoying the predictable revenue and rich customer insights.

However, this new model of commerce comes with a pivotal change in how consumers and businesses interact. When engaging in a subscription, the payment is shifted from being initiated by a consumer to being initiated by a merchant on a consistent basis. Merchant Initiated Transactions (MITs) come with additional considerations that are a new knot for U.S. retailers to untangle. Here are 3 notices to subscribe to in 2023.

Inter-changing fees

For most traditional brick and mortar retailers, subscriptions lead to additional revenue online that can incur significantly higher interchange fees than what you’re used to seeing from your card present. Most merchants don’t have interchange categories dedicated to their industry’s online transactions, so anything happening through a subscription would be sent through the general retail categories (e.g., Visa Product 1 or Mastercard Merit I). Take a look at the difference between a Visa signature preferred transaction in store vs. online.

Visa Signature Preferred – $20 Transaction

Source: Visa Published Interchange Tables1

For subscription-based merchant category codes, like internet providers or streaming services – you get your own category for Visa transactions. However, this category is brand new, as it was created as part of the wider interchange structure deployed by Visa in 2021 and 2022. Will Mastercard follow suit? Will there be additional changes to your rates? Only the future will tell, but you must remain vigilant to prepare for any increases that might be coming your way.

The network fee jamboree

The global networks can introduce new, or increase current, network fees to address a slew of different transaction types, and MITs are no stranger to these additional fees. Because of the environment present with charging your customers on a consistent and long term basis, there are unique situations that arise in which fees are able to be levied. Let’s dive deeper into a couple of specific fees.

Visa Stop Payment Service Fee – This fee applies to every 4th or greater authorization that is attempted after a stop payment request is made by a Visa issuer. In other words, when a consumer requests to stop paying for a subscription, if your business still attempts to authorize the card, then you’ll be charged a dollar per authorization. Ensuring your business keeps proper records and establishes guidelines for cancelled subscriptions is imperative to mitigating this costly fee.

Mastercard Credential Continuity Fee – This fee – $0.03 per authorization – applies to every recurring transaction that is made with an outdated credential 10 or more days after the issuer has reported an account update for the transaction. Therefore, if a consumer’s card expires, or they get an account reissued due to fraud, and your business does not update their credentials appropriately, you will see this fee pop up until the mismatch is resolved by your business.

Clearly, consumer information over time is a significant element of the fee structures around MITs, and keeping up to date information for your consumers is vital, which conveniently brings us to topic number 3:

A token of appreciation (or not)

One of the hottest topics in 2022 payments, tokenization is a prominent consideration for merchants moving online due to its discrete benefits and risks, especially with network-supplied token services. As we’ve seen with some of the network fees charged on MIT-specific transactions, keeping up to date information on your consumer’s payment methods is paramount – and networks will purport that their tokenization solutions will help in this endeavor. By consolidating account updater services in with tokens, networks state that they can ensure every account contains the most up to date information, potentially improve approval rates and mitigate costs of additional fees.2

However, there is a significant roadblock with network tokens, and that is that currently, routing debit transactions could be hindered by the solution due to rules imposed by the service providers. With the recent Federal Reserve clarification opening up routing capabilities and the resultant cost savings to online merchants through transactions in July of 2023, merchants must measure these savings directly against the potential benefits of tokenization to make sure they’re making the best decision for their subscription revenue streams.

How should merchants be thinking about their subscription payments?

Ultimately, subscriptions are clearly becoming one of the preferred ways of consumer interaction with retailers. The consistent revenue and flexibility afforded by these plans shows a significant avenue of growth, but there are many challenges in the MIT environment that merchants need to be aware of to continue optimizing for the most productive payments to their business. The picture has gotten even clearer with the recent PINless clarification; the time for optimization is now, and 2023 is ripe with opportunities for retailers. In 2023, merchants should focus on laying the groundwork for their subscription transactions through utilizing data and building business cases for services to put themselves in the best and most optimal position. For more on MITs, PINless debit, or more payments trends in 2023, please reach out to CMSPI.

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