Two MasterCard Inc. rules governing fee changes and disclosures may catch many in the payment industry unaware even though the rules first became known in December.
That is the assessment of attorneys Howard Herndon and Josh Rosenblatt at Frost Brown Todd LLC, a Nashville, Tenn.-based firm.
“Typically, acquiring banks and processors have processes in place to ensure that rule changes are identified and the appropriate changes made,” they note in an unpublished article. “Confusion over whether the new rules were indeed rules or just ‘best practices’ has caught many in the industry off-guard. As a result, many processors may already be unknowingly in breach of the new rules.”
One rule is that payment processors must now create a fee disclosure schedule to include with merchant applications and agreements. That includes fees such as the merchant discount rate, pass-through rates, interchange plus mark-up rates, bundled pricing plans, and fees for tiered, qualified, mid-qualified, and non-qualified rates, along with authorization and settlement fees.
“While many processors might believe their current applications are in compliance with this rule, they likely are not,” the attorneys note. “The problem is that the fee disclosure must ‘clearly and conspicuously detail the methodology by which each merchant fee is calculated.’ Clearly communicating the methods for calculating fees can be a lengthy, daunting task. Many merchants will not want to read about exactly how the sausage that is their fees is made.”
The other rule change affects how fee increases can be implemented. The new rule requires processors to provide the merchant with at least a 30-day notice separately from any regular fee statement, bill, invoice, or similar method.
“This requirement can be logistically difficult for processors, and is a change from standard operating procedures for many,” the attorneys say. For example, processors may either need to ensure that email addresses on record for its merchants are complete and up to date or send out paper mailers. In either case, it could be a challenge to update email addresses for every merchant, and mailings can be expensive. “As everyone knows, any type of communication highlighting fee increases risks damaging the relationship with the merchant and leading to more attrition,” the authors write. Both rule changes are specific to the U.S. region.
The hazard for payment providers is that fee changes, or more aptly the notification of these changes, can prompt merchants to switch. “These new rules shine a spotlight on fee changes,” says Rosenblatt. “Fee changes lead to attrition. Attrition creates winners and losers. Processors who are able to strategically comply with the changes can use them to as a competitive advantage.”
Herndon says he believes there are strategies payment organizations can adopt that can avoid the increased competition and associated margin compression these rules are sure to generate.
Boston-based Merchant Warehouse is updating its merchant processing application to be in compliance, says Eric George, vice president of sales operations.
“Merchant Warehouse is addressing MasterCard’s fee increase rule by enhancing our communication with merchants in two ways,” George says. “First, earlier this year we started contacting merchants separately through email or direct mail to alert them of changes to their accounts beyond the normal monthly statement message. This has made communication cleaner between Merchant Warehouse and our merchants. Second, we’ve launched a new merchant portal, which will be our primary vehicle for direct communication with merchants.”
George says the overall cost of these efforts is negligible. “In the end, the better you communicate with your merchants, the more they will trust you and the more likely they are to continue to do business with you. It’s far more costly to get a new merchant than keep an old one.”