Visa’s New Interchange Fee and Your Bottom Line: What Do You Need to Know?
By now, if you’re in the payments ecosystem, you know that Visa has prepared a revamp of interchange rates, originally scheduled to begin this month but now pushed to July. The change is being reported as one of “the biggest changes to swipe fees in a decade,” so we dug deep into the report, spending over a hundred hours parsing it. Read on to see how it will affect your company and what action steps you should take.
This is complex, so let’s start at the beginning
Visa’s initiative almost certainly began from a place of trying to help small-ticket merchants (a small-ticket is any purchase $15 or under). Historically, fees have been scaled in such a way that they end up unintentionally penalizing merchants who have a low average transaction. Inevitably, small businesses like bodegas are hit hardest once the fees are factored in. Visa is aiming to correct this by rescaling the percentages and transaction fees. By the end of 2020, once the revamp is fully in place, parking merchants, donation platforms, and QSRs can expect to pay a lower interchange rate with Visa.
Visa’s thinking makes a lot of sense: in order to get small-ticket merchants to accept plastic 100% of the time, card brands had to change the way they charge. They were probably hoping for an added bonus of getting one step closer to a cash-free world, but it’s not likely to actually work. While the biggest sector for cash has always been small-ticket items, for example most bodegas, with average purchases of $10, they will only qualify for the new interchange with Visa–with Mastercard, their fees will go up.
That’s right: Mastercard isn’t following suit. That is going to make it harder for everyone to think in the binary of plastic vs. cash. Really, the issues for merchants now are which cards are in play and how much the purchases are. Visa is, unequivocally, helping the small-ticket merchants. Mastercard, on the other end of the spectrum, is going up for small-ticket convenience purchases. In general, they’ll be adding 2 cents per transaction fee for those under $5 and 4 cents for those greater than $5. While the raise is only a few cents, Mastercard’s change will increase the cost of small-ticket convenience purchases significantly. In essence, that small transaction will become unprofitable to a processor and expensive to the merchant. American Express and Discover, on the other hand, are lowering their exchange rates, but only for transactions less than or equal to $5.
If it seems confusing, it is. So let’s picture it in action: your local bodega has a sign near the register reading $15 Minimum for Credit Card Transactions. The new interchange rates from Visa will be fairer to them. Originally, we thought those bodega signs might disappear altogether. Now, any communications about the change are likely to make the customer’s head spin. A bodega’s new sign might say No Visa under $15, no AMex or Discover under $5, No Mastercard at all–not a very clear message to the consumer.
As you can see, the effect of the updates won’t be simple for bodegas or anyone else. There are no clear winners or losers. The biggest factors that will influence how the changes will affect a particular business are card brand, merchant vertical, transaction size, and card level. One thing is certain: merchants who sell large-ticket items might not be thrilled with the change. Visa’s new swipe fee structure could be construed as “taxing the rich,” but that’s not quite the case. Huge, multinational companies such as McDonald’s and Starbucks stand to benefit, since both have low average transactions. Many merchants with average ticket-prices over $15 can expect to pay a bit more to the card giant. If you’re wondering where your particular business stands, now is the time to dig into your business interchange fees so you can be sure of how significant the changes will be for your bottom line.
Supermarkets fall somewhere in the middle of small and large tickets, and it looks like they aren’t going to get a break. The new rates may turn out to be a wash for them, at least with Visa. Their fees will go up for transactions that are $15 or less and down for those over $15. But, the changes aren’t going to hit them that hard–the average person doesn’t go to a grocery store to buy one measly bottle of soda. The good news is, supermarkets aren’t alone. When it all shakes out, depending on your card mix and average transaction size, the changes could be potentially insignificant or not. Now is the time, more than ever, to understand these details, or get someone on your team who does.
The questions the card brands’ adjustment make imperative for FinTech companies are what is our average transaction value, card brand mix, and card level mix? And how do these intricacies affect our processing fees? If you’re not crystal clear on the answers to these questions, you’re in good company. Most people are in the dark about it. But, if you want to provide the best product for your customer, you’ve got to focus on these questions and create the best possible pricing strategy. Your bottom line will thank you, too. See the example of Square, who modified their famously simple pricing due to this interchange rate structure imbalance.
Ask your team what your average profit effective rate on processing is. There’s a good chance they don’t know the answer. But, once you figure it out, you can begin to strategize. With the support of the right interchange analysis, you can make sure your pricing structure aligns with Visa’s new interchange fees in order to maximize each transaction. By doing this, you could potentially make a big impact on your bottom line.
