Citing a desire to remain competitive and drive issuer participation and innovation in its network, Visa Inc. in April increased the interchange rate it applies to purchases switched through its Interlink PIN-debit electronic funds transfer network.
Visa largely left its signature-debit rates unchanged, so the rate gap between its two debit programs narrowed a bit, according to analysts at J.P. Morgan Securities Inc.
“In our view, the narrowing of signature and PIN interchange rates should continue longer term, but we do not expect the two rates to be identical near-term,” according to a joint statement from J.P. Morgan consultants Tien-tsin Huang and Reginald L. Smith.
As an example, the analysts compared the rates for small merchants under what Visa calls the Threshold III category. The check card signature-debit interchange rate is 0.92% of the sale plus 15 cents versus the Interlink PIN-debit rate of 0.75% plus 15 cents with an 80-cent cap. It previously was 0.65% plus 12 cents with a 65-cent cap. Threshold III Interlink merchants annually handle a minimum 17.5 million transactions and $650 million in volume.
“Assuming a $40 purchase, this equates to an interchange rate of 52 cents for signature and 45 cents for PIN,” the analysts say.
Merchants with a minimum 8.1 million check card transactions and $460 million in volume meet the requirements for signature in the Threshold III category.
The gap is similar for large merchants under Threshold I, though they pay less per transaction. “For larger merchants, a $40 purchase would result in 38 cents in interchange for signature and 30 cents for PIN. The specific rates for that threshold are 0.62% plus 13 cents for signature and 0.5% plus 10 cents with a 60-cent cap for Interlink purchases. The previous Intrerlink rate was 0.45% plus 8 cents with a 45-cent cap.
To qualify for Threshold I, merchants must handle a minimum of 88 million transactions and $4 billion in volume
The analysts were not available for further comment.
In a statement, Visa says it is “making a variety of program and interchange modifications to make digital currency even more convenient for consumers and merchants and to facilitate continued growth for Visa and its clients through increased issuance and acceptance.”
Rate Changes
Visa made a variety of other rate changes for Interlink purchases.
The PIN-debit rate for an “eligible retail merchant” under Threshold II with a minimum of 43 million transactions and $1.9 billion in volume increased to 0.6% of the sale plus 13 cents with a 70-cent cap from 0.5% plus 10 cents with a 65-cent cap.
“When the Visa debit category is looked at as a whole (Visa check card and Interlink together), and both Visa’s increases and decreases are taken into consideration, the amount of change on the average Visa debit transaction was only 1.6 cents (or less than 4%),” Visa says.
The systemwide effective interchange rate in the U.S. is 1.63% and has remained effectively flat the last decade, Visa says.
Visa increased the Interlink rates at a time when it just announced strong second quarter results. Last week, Visa reported its U.S. card-payments volume jumped 13%, to $427 billion during the fiscal second quarter ended March 31 from $378 billion during the same period last year.
Joseph Saunders, Visa chairman and CEO, downplayed the changes made to debit interchange rates. “I don’t think that the trend from signature to PIN is any much different than it’s been for quite a while,” he said. “While the PIN volume has grown, so has the signature volume, and the signature volume is considerably more than the PIN volume.”
PIN-debit volume, however, is increasing at a faster rate than that for signature debit, according to Patricia Hewitt, director of the debit advisory service at Mercator Advisory Group Inc. “That is one of the drivers for [the increases],” she says.
Hewitt believes looking ahead, both card issuers and the networks will realize continuing to support two interchange schemes will not make sense to the market or to consumers. “This becomes quickly apparent when we consider a virtual e-wallet transaction where there is no card to swipe” and the transaction is contactless, she says. “How does the question of PIN and signature debit get answered in that scenario?”
However, one particular rate–what Visa calls the Qualified Supermarket-All Other category–did draw the ire of the Food Marketing Institute, an organization that represents food retailers. Visa raised the Interlink rate for that category to 0.95% of the sale plus 20 cents, capped at 35 cents–the same rate Visa applies to signature-debit purchases for that category. Visa did not reveal qualifications for that category.
The previous Interlink rate was a flat 25 cents per transaction, meaning supermarket acquirers will pay issuers 40% more when the cap is reached.
The Food Marketing Institute contends PIN-debit purchases should have the least-expensive rate. “[PIN-debit] is the payment we most encourage [through PIN steering] because that’s the transaction we see as most secure with little risk,” she says. “When our industry profit margins are about 1.5%, paying more for these type of transactions is not sustainable for us,” says Jennifer Hatcher, the institute’s group vice president of government relations.
Visa declined to discuss specific categories.
The topic of interchange came up last week before Congress. On April 28, the U.S. House Judiciary Committee heard testimony about the affect interchange has on retailers and consumers.
Judiciary Committee Chairman John Conyers, D-Mich., has proposed the “Credit Card Fair Fee Act.” The bill, which hinges on antitrust law, would require Visa and MasterCard Worldwide to enter into negotiations with merchants to set interchange rates. The U.S. Justice Department would oversee negotiation. Hatcher’s group, along with others, will continue to push for interchange reform this year. “This is something we’ve been fighting for a long time,” she says.
The Food Marketing Institute would welcome the ability to negotiate interchange rates, Hatcher says. “A market-based rate is fair,” she says. “That’s how rates are developed in all other areas of business.”
