Interchange: Tweaks Or Trouble?

After a long period of stability, bank card interchange rates may be about to change.

Visa Inc. reportedly is planning adjustments that could raise merchants’ acceptance costs for card-not-present transactions but lower costs in some other categories, including purchases at big grocery-store chains.

Citing a Visa document circulating among the network’s client banks, the Bloomberg news service reported last month that interchange for a $100 card-not-present purchase with a premium credit card could rise 4% to $2.60 from the current $2.50. Costs for the same purchase with a standard Visa credit card would increase nearly 5% to $1.99 from the current $1.90.

Interchange on a $50 premium card transaction at a high-volume supermarket, however, will drop 33%, to 77 cents from $1.15. (Visa’s current interchange schedule for high-volume supermarket transactions lists the fee for “traditional rewards” and certain other credit cards at 1.15% of the sale plus 5 cents.) Rates in some services categories, including education and real estate, also are expected to decline, the news service said.

Visa reportedly will roll out the new rates in April and October to give processors time to implement the changes, according to Bloomberg. Both Visa and Mastercard Inc. typically update their interchange rate schedules in April and sometimes make further adjustments six months later.

Visa declined a Digital Transactions request for comment. Apart from occasional minor adjustments, interchange rates—always a controversial topic among merchants, who ultimately bear the cost—have been stable since at least 2012, according to studies by the Federal Reserve Bank of Kansas City (“Merchants’ Double Whammy,” December 2019). Since then, however, the use of higher-interchange premium cards has increased, and merchants are paying more in network fees.

“Let’s be blunt,” the Retail Industry Leaders Association trade group said in a statement. “Visa teasing that rates will go down for ‘some’ is masking the true impetus for this plan—their aim is to hike rates on the vast majority of merchants.”

The Bloomberg report claims “Visa is planning the biggest changes to swipe fees in a decade.” Quoting from the Visa document, the report says “‘the U.S. credit interchange structure has been largely unchanged for the past 10 years. Based on the most recent review in the U.S., Visa is adjusting its default U.S. interchange rate structure to optimize acceptance and usage and reflect the current value of Visa products.’”

An analysis from New York City-based investment firm Keefe Bruyette & Woods says the coming Visa changes will likely affect small and mid-sized businesses more than big ones. Large national merchants with enough transaction clout can negotiate their own rates with the networks, whereas smaller retailers’ card costs follow the official schedules. The networks charge interchange to merchant acquirers, who pass the cost on to their merchants.

The KBW report by analyst Sanjay Sakhrani says Visa’s planned changes will help realign “some aspects of the company’s interchange structure between high-value card-not-present transactions and lower-value card transactions. Over time, we think the changes could help Visa volumes, as SMBs could be more inclined to accept card[s] with the lower rates.”

Sakhrani further said he expects Mastercard to follow suit “if it hasn’t done so already.” And for American Express Co., “we believe that the change is mildly positive as it strengthens [AmEx’s] argument that in many cases the rates on premium Visa (and Mastercard) credit cards are equal to or higher than the discount rate it charges merchants.”