How Do the Latest Set of U.S. Interchange Changes Affect Merchants?

27th March 2020
Contributor:
Callum Godwin
Callum Godwin

The global networks have announced all credit card interchange fee changes for merchants will be pushed back from April to mid-July, citing the COVID-19 pandemic.

These amendments are set to have a significant impact on many U.S. industries. In this blog, we share our estimations on the total impact and who the winners and losers are going to be.

What Is Interchange?

Interchange fees are paid by merchants to card issuers (via the merchant’s processor and the card networks) following every card transaction. According to Mastercard, interchange exists to “compensate the issuer for the value and benefits merchants receive when they accept electronic payments”. However, the merchant community disputes this, and interchange fees have been subject to regulation and litigation across the globe in recent years.

Interchange fees are set by the card networks – the largest of which are Visa and Mastercard. They are fixed, non-negotiable fees which are publicly available:

 

How Regularly Does Interchange Change?

These fee changes represent the first major changes to U.S. interchange fees for a decade. Higher fees in recent years have been driven by other factors – network fee hikes, changes in issuance patterns and volume increases.

 

July 2020 – Visa

Total estimated cost impact: $80m cost increase.

What’s happening? Visa is fundamentally changing its grocery store interchange fee structure. Tiers are changing, making it harder to hit higher volume tiers. However, fees themselves are decreasing substantially for all large merchant tiers, and a new tier zero for large merchants has been added. Small grocers should see a small fee benefit.

Fees are increasing for some Card Not Present (CNP) and commercial card transactions, which will affect several non-retail sectors – including airlines, travel and hotels.

Non-qualified transactions are seeing substantial fee increases, with Electronic Interchange Reimbursement Fees (EIRF) and Standard programs being replaced by a new, more expensive ‘non-qualified consumer credit’ tier. There are also changes to MCC categorizations and additional fees for reversals.

Winners: Large grocery chains can expect to see 15-30 bps of interchange fee decreases.

Losers: Online merchants, merchants accepting high commercial card volumes, merchants with high volumes of key entered transactions.

 

July 2020 – Mastercard

Total estimated cost impact: $383m cost increase.

What’s happening? There are fee increases for most merchant verticals for Mastercard. Mastercard’s most prominent programs, the Merit I and Merit III programs, which nearly every merchant sees, will also be increased.

Winners: Travel & Entertainment (T&E) and passenger transport verticals will see fees decrease by around 15bps

Losers: All other industries can expect to see Mastercard rates increase by up to 15bps, aside from large grocery chains who are unaffected. Airlines will see 10bps of increases, fuel merchants 14bps and general retail 10bps (all figures weighted average).

Despite U.S. interchange fees being some of the highest in the world, they’re still rising for most industries.
It’s particularly frustrating for grocers, who will miss out on three months of lower interchange fees. There are more losers than winners here – and as usual, small merchants are facing the brunt of it.
During this tough time where most retailers are either shut or operating on the thinnest of margins, the right thing to do would be to provide complete amnesty on fees.

Alex Ellwood, CMSPI Head of Advocacy

October 2020 – Visa

Total estimated cost impact: $268m cost increase.

What’s happening? Similar to Mastercard in July, Visa is making changes to its most prominent spending programs, the Card Present and the Card Not Present programs – which they are renaming to Product 2 and Product 1, respectively. Both programs are seeing some increases in October.

Visa is changing the structure of restaurant interchange fees, eliminating the cents per transaction fee component and increasing the ad-valorem (%) fee component.

Retail interchange fees are also being adjusted, with reductions for Tier 1 (i.e. very large merchants) and increases for smaller merchants.

Other changes are being made to interchange fees for industries such as taxis, subscriptions, travel, education, healthcare, real estate, advertising and insurance.

Winners: Large retailers, Quick Service Restaurant chains with an average ticket value (ATV) below $8.88

Losers: Quick Service Restaurant chains with an ATV of above $8.88, small retailers.

 

Note: All projections are based on CMSPI estimates and proprietary client information. All cost impacts are annual calculations.

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