#2 Direct Marketing Subscription Merchants

A Real Opportunity for Merchants to Save Money on Credit Card Fees

Historically, information on interchange rates was restricted to members of the Credit Card Associations and affiliated payment processors.  Ironically, Interchange generally represents the bulk of what merchants are required to pay the credit card systems!  According to an extrapolation of data contained in Visa’s SEC registration statements, merchants paid over $100 billion of Interchange in 2006.

In this same year, however, both Visa and MasterCard decided to publish their respective Interchange rates.  For the first time since the inception of the Associations, merchants were encouraged to “do the math” and understand their true fee structure.  This translated into a real opportunity for merchants to save money on Interchange fees.  The following three examples are drawn from real-life scenarios, and are designed to illustrate the profound monetary effects of understanding Interchange principals.

Case 2:  Direct Marketing Subscription Merchants:

In April of 2007, Visa mandated a program change affecting direct marketers engaged in subscription and continuity businesses.  Covered by the Merchant Category Code 5968, this rule change provided some opportunities and problems for merchants offering subscription services such as periodicals, music clubs, and social networking sites.  Prior to the change, these merchants were subject to the “Card Not Present” credit card rate of 1.85% + $0.10 per transaction and the CNP debit card rate of 1.60% + $0.15 per transaction.

Under the new program, these merchants were now entitled to the Interchange rates associated with the “Retail 2” program.  Under this program, credit cards received a rate of 1.43% + $0.05 per transaction, while debit cards received a rate of 0.8% + $0.25 per transaction.  This new scheme provided a clear win for merchants processing credit cards, as both components of the new Interchange rates were cheaper.  The net savings for these transactions equaled 0.42% + $0.05 per transaction.  Unfortunately, the case for savings was not as strong for debit cards, where the difference between the old and new rates equaled 0.80% + -$0.10.  So, while the percentage portion of the differential provided a savings, the fixed portion of the fee was more expensive.

As it turns out, this new debit rate becomes more expensive than the old rate for products and services selling under $12.50.  So, merchants selling products over $12.50 enjoyed savings all around.  For merchants selling products under $12.50, the overall savings (or loss) depended on the percentage of debit cards processed by the merchant.  For merchants processing a large debit card percentage, the new program might have resulted in an overall loss.

The mathematical framework and calculations behind this case can be found in Chapter II of The Merchant’s Guide publication, Understanding Merchant Account  Fees In Card Not Present Environments.
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