As the Durbin Amendment’s provisions began to take effect on October 1st, Visa radically shifted its interchange fees on prepaid debit cards, in response to the new regulations. The Durbin Amendment caps the debit interchange rate at 21 cents plus 0.05% of the total sale price, with the opportunity for one additional cent, but the cap excludes most prepaid debit cards. Visa is mixing up the transaction rates for prepaid cards, leaving some merchants in a much better position than others.
Supermarkets get the best deal
At first glance, Visa seems to treat all merchants equally. Previously, the swipe fee for basic retailers and supermarkets was 20 cents plus 0.95% of the transaction. For gas stations, it was 17 cents plus 0.75% of the transaction. The new rate for all three is the same across the board: 15 cents plus 1.15% of the transaction.
Under this new pricing system, retailers and supermarkets actually pay smaller fees for transactions under $25, and it seems fair to charge all merchants the same amount for a prepaid debit card transaction. Unfortunately, it’s just not that simple. It turns out that supermarkets get coddled, while gas stations get hammered.
Supermarkets’ interchange fees are capped at 35 cents, but basic retailers have no such protection. Remember that the interchange rate is lower for transactions under $25, or about 45 cents in swipe fees. This means that supermarkets get the benefit of lower rates on small transactions, and are protected from the higher rate by the cap. Basic retailers, on the other hand, will pay much higher fees for all transactions that top $25.
While supermarkets were insulated from rate hikes, gas stations saw their rates skyrocket. Although the fixed per-transaction cost is 2 cents less, the variable cost is 0.4% higher. Though the numbers might seem negligible, this results in a rate increase in transactions over just $5. They enjoy a 95-cent fee cap, which sounds generous, until you realize that the cap doesn’t go into effect unless someone spends more than $70 to fill up their tank. Assuming $4 a gallon of gas, that’s 17.5 gallons pumped per visit – unrealistic for most cars.
It’s only sensible that Visa will try to maximize profit and raise fees where they can. But why give the supermarkets a break? It turns out supermarkets provide a significant portion of Visa’s prepaid debit transactions, giving the card network an incentive to play nice. Additionally, supermarkets have more collective bargaining power than most merchants, so they’re more likely to complain if interchange rates get out of hand. Finally, many merchants never see the exact interchange fees they pay. Instead, that charge is bundled with a variety of other services and billed as one expense. A large chain committed to cost-reduction can dedicate the resources to ferreting out this obscure fee, but a mom-and-pop store likely cannot.
For now, no competition, no worries
With the growing popularity of prepaid debit cards, merchants will likely have no choice but to follow suit and pay the new fees if they want a Visa-affiliated processor. They can hardly turn away every customer with a Visa prepaid card at the point of sale.
But if merchants want to process their cards elsewhere, that’s another issue entirely. The Durbin Amendment doesn’t affect the prepaid debit interchange rate, but it may affect Visa’s hold on the prepaid processing market in the future. Beginning in October of this year, all debit cards (excluding prepaid) must have the capacity to be routed on at least two card networks. Moreover, the networks cannot prevent merchants from processing cards elsewhere. This provision is meant to inject competition into a market previously dominated by the Visa-MasterCard duopoly. But while the “network exclusivity” provision took effect on October 1st for regular debit cards, it does not apply to prepaid cards until April of 2013. Merchants will then have the opportunity to shop around for a prepaid processor.
But that doesn’t mean they will. When a merchant signs up with a payment processing company, she’s usually charged a monthly fee that bundles interchange fees with other services, so the merchant has no way of knowing exactly how much she paid. Unless she’s carefully following finance news, she may not even know that interchange rates have been capped.
Additionally, prepaid debit cards are a relatively new invention, and Visa’s stronghold on the payment processing market is particularly pronounced with debit cards. Unless that changes, they can probably get away with price hikes. Word on the street suggests that similar strategies are working for them already. In the past year, Visa’s made a fairly significant increase in revenue from new service fees across the board without driving away too many customers in the process. And their stock value is on the up-and-up, suggesting investors trust their judgment. Only time will tell if the price hike strategy ends up working for Visa in the brave, new post-Durbin world.