#1 Municipalities & Visa Interchange

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 1:  Municipalities & Visa Interchange:

A major Midwest municipality developed a website designed to allow citizens to pay fines, traffic citations, certain taxes, and municipal utility bills with their Visa® and MasterCard® credit cards.  The city obtained a merchant account from its commercial bank, which contracted out such activities to a large payment processor.  Because the city processed citizens’ payments through a Web site, it was classified as an “e-Commerce,” merchant and was assigned the customary online Mastercard and Visa Interchange rates.  Within two years, the city was processing at a rate of $7MM per year, with an average payment value of $183.00.  Sixty percent (60%) of the city’s transactions were made with Visa cards.  Of this percentage, 65% of the payments were made with debit cards which received an Interchange rate of 1.60% + $0.15 per transaction.  The remaining 35% of the payments were made with credit cards which received a rate of 1.85% + $0.10 per transaction.  At the annual rate of $7MM,  the municipality paid total Visa Interchange fees of approximately $123,000 per year.

Because of the high volume of fees flowing through the Web site, the city decided to perform an independent audit of its credit card operations.  The municipality soon found out that they had been eligible for a less expensive Interchange rate from the inception of the Web site.  Under a special program mandated by Visa, the municipality should have received Interchange rates associated with the “Retail 2” program.  This program provided for debit card rates of 0.8% + $0.25 per transaction and credit card rates of 1.43% + $0.05 per transaction.  Applying this fee structure moving forward, The city now paid total Visa Interchange fees at a rate of only $78,000 per year its annual sales of $7,000,000.  This 37% savings was augmented with additional savings from a similar program offered by MasterCard.

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