Visa and MasterCard Make Their Money on PIN-based Debit Transactions
In previous posts I have talked about Visa and MasterCard turning to Debit and prepaid cards to re-coop money lost on defaulted credit cards. These types of cards used to be the cheapest form of electronic payment a merchant could accept – that seems to be changing these days.
It is estimated that PIN-based debit transaction Interchange costs have gone up nearly 85% in the last year alone. The rise could be attributed to a large consolidation between debit networks. Whenever there is consolidation, there is typically less competition and the result is higher PIN-based debit costs to processors and higher interim costs to merchants. Interlink’s current fee is nearly $0.76 per transaction and Pulse’s is over $0.64. Many merchants have become accustomed to paying flat fees for PIN-based debit transactions but in the coming years that will be a thing of the past.
Will Lack of Credit Options Lead to Rising Interchange Rates?
If we have learned anything over the last year, it is that no industry is immune from the financial crisis. Your first line of defense against the economy is your job. The second is your credit cards. Credit cards have forced a whole new financial difficulty on our country. In a previous post, I spoke about the new rules that will be taking effect in 2010 regarding interest rate increases. But what is going to happen in the meantime?
Many large credit card companies, such as Capital One, are disclosing a rise in delinquencies for November of 2008. Issuers, like American Express and Bank of America, are raising rates on existing balances and slashing credit lines in the short term. Banks are expected to cancel $2 trillion in available credit over the next year. If credit card issuance is being cut and rates will soon be regulated, it only seems inevitable that banks will turn to raising Interchange rates on merchants to cushion the fall.
Rate Gauging on Consumer Credit Cards Gets the Boot
As if there is not enough controversy over Interchange Rates charged to merchants, we now have to deal with consumer credit card interest rates increasing drastically without notice. Some consumer spending experts say this may hinder spending even more this holiday season. What is our government doing to fix the issue?
Federal regulators jumped into action and passed laws to protect consumers from increased interest rates on existing account balances. Government rules seem to run at a snail’s pace as these laws will not take effect until July 1st 2010; that’s a lot of money in the banks’ pockets in the interim. Millions of card holders will get raked over the coals, paying high fees on previously made purchases until these laws kick in.
Credit card companies will still be able to raise rates on new credit cards, future purchases or cash advances. Finally, the Federal Reserve and National Credit Union Administration are cracking down on arbitrary hikes in interest rates. It would seem that we have learned a lot from subprime lending. These rules will also stop the issuing of credit cards to people that all ready have a large amount of debt, and who were previously getting approved by banks for high interest rate cards.
Some of the new rules include:
Card Association Battles Around the Globe
It seems as though anytime a company gets large enough, there will always be people who feel it is unfair and begin to wage war on what they don’t know. I have talked about Visa and MasterCard having to pay large settlements to Discover after a long anti-trust battle. Although Visa lost that battle, the war on card associations is still ongoing.
Overseas, many organizations have formed campaigns against Visa and MasterCard. In Canada, ad campaigns are being run by The Retail Council of Canada telling Visa and MasterCard to “stop sticking it to retailers.” The Retail Council of Canada is a non-profit association that represents more than 40,000 stores of all retail formats.
Terms to Know When Shopping for a Merchant Account
Over the past couple of weeks I have run into many merchants that feel ripped off by their merchant sales representative. Time and time again I hear “I just didn’t know what to ask for.” Like with any other purchase for your business, it is important to learn about your product.
Here is a list of common terms you should know when talking to credit card processing companies:
- Qualified Rate – This is typically the rate you are quoted when you sign up for a merchant account. This rate only applies to swiped regular retail cards. Be sure to ask what your Mid-Qualified and non-Qualified rate will be.
- You may also be charged an Authorization fee. This is the amount charged to a merchant account each time communication happens between the software or point of sale terminal and the authorizing network. Make sure you are not charged an additional transaction fee because the two are the same.
- Your sales agent may refer to Basis Points. Basis points are the percentage that you are charged on a credit card transaction. One basis point is equal to 1/100th of 1 percent. Thus a rate of 1.85% is equivalent to 185 basis points. For some merchants, a basis point mark above Interchange is advantageous. Continue reading →
