New Visa & MasterCard Fees
Pose Profound Cost Increases to Direct Marketers
April 2009

Usually April brings thoughts of springtime and other things warm at a time when we need it the most. Unfortunately, this spring, Visa® and MasterCard® have cultivated some new fees that will actually burn-up the hearts and minds of some direct marketers. One change from MasterCard and three changes from Visa will significantly increase cost to these merchants. Direct marketers utilizing free trial periods and recurring payments with low average ticket values (ATVs) will suffer potentially painful consequences. These merchants include music clubs, publications, credit reporting bureaus, buying clubs, and many other popular services.

This disturbing development starts with new general fees from Visa and MasterCard: MasterCard has introduced a new fee called a Network Access and Brand Usage (NABU) fee of $0.0185 to be applied to all U.S. based settlements.  Visa has introduced a new fee called an Acquirer Processing Fee (APF) fee of $0.0195 to be applied to all U.S. based authorizations starting in July 2009.

Keep in mind that these fees are in addition to the 0.0925% MasterCard assessment fee and 0.095% Visa assessment fee merchants already pay the networks! Mind you, there are other assessments, but if you stick to the big ones, you end up with Association fees looking like:

0.0925% + $0.0185 for MasterCard, and
0.0950% + $0.0195 for Visa.

I’ve never coined a popular term or acronym, but I would like to try here. I would call the combination of these fees, “Itty-Bitty-Interchange,” or IBI for short. Sure looks like Interchange, only the numbers are smaller. And now that Visa and MasterCard are public, they must believe that their stakeholders are entitled to the big bucks like card-issuing banks (forgetting the current economy and default rates.) I was impressed by the pro forma financial analyses performed by: Digital Transactions, which monetized these financial gains.

These new fees are hardly a deal-breaker for a merchant selling a product for $75.00, pretty close to the average credit card charge in the U.S. These merchants would end up paying an extra 0.035% with Visa and 0.025% with MasterCard – no issue. Consider, however, the merchant that sells a $9.00 item. Its increase would be 0.22% with Visa and 0.21% with MasterCard. These percentage rate increases, although not catastrophic, are certainly close to what I would call a downgrade when speaking of Interchange.

In my book, “Understanding Interchange,” I state with direct citation from the associations that their networks are geared toward dollar volume and not transaction quantity. It really shows with these new fees, but the carnage doesn’t stop here. Visa, the larger of the two associations, has introduced two rules that would cause additional damage -- up to 230% greater than the damage caused by the APF! Starting this month, Visa will institute two fees that strike at the heart of merchant who utilize free trials as part of their marketing strategy.

These merchants, when accepting a new trial member, typically wish to validate that the prospective member has a valid credit card. In order to do this, they would normally process one of two transaction types:

The “One Dollar Authorization (ODA)” – In this case, the merchant submits an authorization transaction for one dollar, never intending to settle this authorization. An approved authorization response shows the merchant that the cardholder’s account is valid, and that it is generally OK to proceed with the trial. The authorization only decreases the cardholders spending limit by $1, with this small credit-limit decrease eventually expiring. These authorizations will often appear in the cardholder’s online card statement. If the billing descriptor is not presented correctly, the consumer can become suspicious of or confused about the charge. Merchants sometimes pass bad billing descriptors, and card-issuers will sometimes truncate the billing descriptor or omit it altogether. The ODA fee commences in July 2009.

The “Zero Dollar Verification (ZDF)” – Also known as an “AVS-only” transaction, its purpose is similar to the One Dollar Authorization. The principal differences are that the value of the authorization is literally zero, and the merchant asks for the Address Verification Service. Effectively, the ZDF response only tells the merchant that the card has not been lost or stolen (hard decline), and that [part] of the address matches the address-of-record of the cardholder according to the card issuing bank. In general, it is a weaker form of prospective customer verification; however, this type of authorization is rarely displayed in the consumers’ online report, and therefore eliminates all potential cardholder confusion.

Traditionally, merchants have considered these authorization transactions as being a nominal cost of doing business. That is, the merchant has generally paid its payment processor the same fee for these transaction as it would for any normal authorization. That’s all about to change.

Starting this month (April, 2009), Visa has introduced a $0.025 fee for ZDF’s and a $0.045 fee for ODAs. Payment processors will add this charge on top of their current authorization charge if their contract permits such changes. So let’s take another look at the merchant selling $9.00 goods. Including the new Acquirer Processing [authorization] Fee of $0.0195, the merchant will see an additional cost of $0.0645 (0.72%) on ODA’s and an additional cost of $0.0445 (0.49%) on ZDFs. For high volume merchants, these new Visa fees can add-up quickly.

There may be one saving grace that comes in the form of a Visa reprieve on ODAs. According to a memo circulated by First Data Merchant Services®, this fee can be avoided by “properly reversing” the ODA. Regrettably, this reprieve may be a moot point for several reasons. First, not every processor supports authorization reversal transactions. The processors that do support reversals generally charge their standard authorization fee, potentially negating the ODA penalty savings by performing a reversal. What’s more, merchants would incur programming costs to install reversal capability into their business processes. So, if your processor’s standard authorization fee is under $0.045, and the cost contribution of system changes on a per transaction basis are lower than the difference between the ODA penalty and your standard authorization fee, it may be worth the effort.

While it’s generally not possible to determine why the Associations make such rate decisions, one can certainly speculate. This is clearly an action that will generate significant fees for Visa and MasterCard and benefit their stockholders. The Associations continue to maintaining razor sharp focus on building large-ATV-volume networks, thus discouraging low-ATV merchants – in Visa’s case, especially those offering free trials. And for some reason, Visa favors ZDFs over ODAs, as the penalty for the former is smaller.

So, when you view your online merchant account report, or open your merchant account statement next month, don’t be surprised to see these fees. Fortunately, some payment processors lag in implementing new fees. The lessons here, however, are to work with your processor to mitigate these fees and do it fast -- because these rule changes are now law.