4. The Natural Trend Toward Higher Average Ticket Values

Merchants processing under a bundled discount arrangement have a natural enemy.  Ironically, their nemesis is the natural trend toward higher average ticket values.  It seems intuitive that all businesses strive to obtain greater prices for their products.  This phenomenon is very evident in the Direct Marketing industry, which makes constant use of up-sell and cross-sell techniques.  Sure enough, according to data extrapolated from the Nilson Report, from 2001 to 2006 the average value of a credit card transaction for all major brands increased by $9.84 or 12.7%.(4)

Figure 3. Increasing Average Ticket Values
Source: The Nilson Report

So, under the bundled discount arrangement, as merchant ATVs increase, so do the absolute monetary fees paid to their processors

One might argue that this is not a fair point because bundled discount rates are based on Interchange, which has a large percentage-fee component of its own.  If a merchant’s ATV increases, then the processor must pay the card issuing banks more in Interchange, correct?  Not necessarily.  Over the past several years, the Associations have reduced Interchange fees for many business types.  These reductions cover many industries including subscription merchants, utilities, quick-service restaurants, government related agencies, emerging markets and others.  The most significant reduction of all, however, came in 2003 when rates for all debit cards were reduced.  As will be described later, this provided many processors utilizing a bundled model with a substantial windfall.

(4) The Nilson Report, “Credit & Debit Card Totals 2001-2011,” October 2007, Issue 889, Pages 7, 8