Over the years, we have seen many increases in interchange fees. Every 6-12 months, Visa/MC will pinpoint specific interchange rates that they choose to go up or down (mostly up). These increases usually apply to only a few categories each release, and they are fairly straightforward to forecast the cost impacts. For example, in October 2017, Visa increased Commercial Card Not Present Purchasing and Corporate cards from 2.65% to 2.70%. For most merchants, this was not a major increase (only 5 basis-points) as it only applied to these specific card types and only on CNP sales missing Level 2 data. To quantify financial impact, all a merchant would need to do is look up their historical volumes for these rates, and multiply by the 0.05% increase. Pretty simple…
But behind the scenes, a much larger impact to merchant costs have been occurring and you may not have even noticed it.
In April 2007, Visa introduced a new transaction attribute called the “Product ID”. MasterCard quickly followed suit with their version of the same technology (Product Code). This was a monumental shift in the card industry because it allowed issuing banks to control the “product” or class of credit card at the account or cardholder level. This allowed for greater flexibility for the issuers and opened up the ability to enhance the rewards level of any credit card at any time. The higher the level of the rewards, the greater the interchange rate.
Because of this new functionality, the card issuing banks started converting cardholders to Rewards/Premium cards or Super Premium cards at an incredible pace. Merchants that saw only 5-10% in Super Premium cards in 2007, may now see almost 50% Super Premium cards today. And classic cards, which were over 50% share before 2007 may now be lower than 5% share of volume for some merchants. These increases in the card mix are causing increasing costs to your business, even though you cannot control these costs.
For example, if you are a Retail merchant, I challenge you to review your statement and find your volume of “CPS Retail Credit”. For an interchange category that was once considered a staple for the Retail industry, my bet is that these volumes are almost non-existent. Try it with any of these categories, once considered the “best available rates”:
- Visa CPS Retail/Merit III Credit (Retail Industry)
- Visa CPS Card Not Present/Merit I Credit (CNP/MOTO Environment)
- Visa CPS E-Commerce Basic/Merit I Credit – Ecommerce (Ecommerce Environment)
- Visa CPS Passenger Transport/MC Passenger Transport (Airline Industry)
- Visa CPS Restaurant/MC Restaurant Credit (Restaurant Industry)
- Visa CPS Hotel Card Rental/MC Lodging Auto Rental (Lodging/Auto Rental Industry)
This is one reason why we stress the importance of payment analytics. If you are not tracking your percentages of Rewards/Premium or Super Premium cards, you could be having issues forecasting your costs. Or even worse, spending hours of time researching cost increases for one of your locations, when the explanation is simply an increase in the higher end card mix. With analytics, the answers to your questions are right there, and can help you be a payments guru within your treasury organization. And, as a bonus, payment analytics can also help you reduce costs through interchange optimization, least cost routing and fee benchmarking.
For help determining your Premium or Super Premium card mix, please reach out to Joey at OPC for a discussion or a demo of OPC’s proprietary analytics.