By Ray Birch
PETERBOROUGH, N.H.—It isn’t just the coronavirus that is going to be affecting the future of many retailers—Visa’s biggest rate change in its merchant fees in a decade is going to have a significant impact on retailers, as well, according to several sources.
And it won’t just be retailers adjusting to the fallout: consumers and issuers will be feeling some of the effects, too, sources said, with one person saying there is an even “bigger story” that deserves attention.
The company's interchange fees will rise or fall depending on the merchant and the way a consumer pays for their purchases, according to a document Visa sent to financial institutions that outlines the changes.
Bloomberg reported that higher rates are looming for transactions on e-commerce sites, while retailers in certain services categories, such as real estate and education, will see fees decline. The move, experts say, is being made to persuade more people to abandon checks, adjust for the greater shift to e-commerce sales, and account for growing online fraud.
According to Bloomberg, Visa’s proposed changes will increase the swipe fee for card-not-present transactions, which include those made online or over the phone. For a traditional Visa card, the fee on a $100 transaction will climb to $1.99 from $1.90. For premium Visa cards, the fee will rise to $2.60 from $2.50. On a premium-card transaction of $50 for the category that includes large supermarkets, the interchange fee will drop 33%, to 77 cents from $1.15.
Mastercard, AmEx, and Discover have announced similar changes. All changes, including those by Visa, were scheduled to go into effect this month. However, due to the pandemic the changes have been postponed until July.
Pay Attention
Tim Kolk, TRK Advisors
Tim Kolk, principal at TRK Advisors, told CUToday.info that issuers should pay close attention to what Visa is doing.
“As much as Visa and Mastercard look to optimize their revenue sources and parse through merchant category spending, credit union issuers need to do the same,” said Kolk. “Now, more than ever, these changes will advantage issuers with a lot of card-not-present transactions and disadvantage those with transactions in the large supermarket category.”
Kolk added that if a credit union has built its card program on “bread and butter” middle market spenders, it is possible they will have relatively more spending in the categories where interchange rates will decline.
“And this will lead to revenue declines, and even modest declines over long periods can hurt profitability and ultimately impair the ability of the credit union to invest what is needed to keep a program competitive,” he said. “Tactics to incent and protect spend in the higher interchange categories become even more important than they were yesterday.”
Initial Revenue Bump
Tom Church-Adams, SVP of pay products for CO-OP Financial Services, said issuers may see more interchange revenue at the outset.
“It’s tough to quantify how these changes are ultimately going to affect Visa issuers,” Church said. “There could be an incremental bump in issuer interchange, depending on an issuer’s portfolio and the payment habits of their cardholders. However, this could also impact card spending if those merchants pass on the increased cost to consumers… It’s encouraging that the higher risk card-not-present transactions will pay higher rates and more types of merchants can choose to accept Visa as a payment method.”
Lou Grilli
Two Trends
Lou Grilli, senior innovation strategist at PSCU, examined what may be behind Visa’s change.
“On the brick and mortar side, two trends are driving changes: First, fraud is significantly decreased at the POS due to chip cards. Second, merchants—such as Walmart and Kroger—have waged a very public battle with Visa over interchange. Visa taking action now to lower interchange for brick and mortar makes sense to reflect the shift in fraud to online, and possibly appease large merchants preemptively.”
Grilli finds it “interesting” real estate and education businesses will see their fees decline.
“Real estate transactions remain stuck in wire transfer, and the education business is mostly ACH and check,” noted Grilli. “I’m sure Visa would love to see these very high-dollar transactions flow through their network. I would love to use my credit card and get the points for these big-ticket items.”
The Speculation
There remains a great deal of speculation that consumers will feel an impact from the change, according to Grilli.
“My overall perspective is that while this news seems to have caught everyone’s attention, it doesn’t strike me as a fundamental shift in the payments model,” said Grilli. “Merchants pay the merchant discount rate, the merchant processor passes on the interchange to the issuer. Visa and Mastercard do not get any portion of interchange but they do collect fees from both the merchant processor and the issuer.”
The ‘Bigger Story’
PSCU’s chief growth officer, Brian Scott, said Visa is simply responding to the mix in transaction activity.
Brian Scott
“There is more card-not-present transactions than ever, and this is also a small nod to the fact that with more of those types of transactions, there is likely to be a higher potential for fraud on those since they are not EMV chip protected. I think the bigger story here is that Visa is continuing to focus on getting their cards into transaction types that they typically have not focused on—rent, vending, etc., all of which will ultimately move Visa closer to P2P.”
Always a ‘Big Deal’
Bill Hardekopf, CEO at LowCards.com, does not believe consumers will initially feel the effects.
“Consumers are fairly unfamiliar with interchange fees, probably because they don't have to pay them, at least directly. They will only feel the effect of this if merchants raise their prices in some noticeable way,” said Hardekopf. “On the other hand, anything to do with interchange fees is a very big deal to merchants. Ask any merchant and they will say this is one of their biggest expenses. So any change in this is always a big deal.”