Friday, April 30, 2010
MasterCard's revamped interchange structure divides into three tiers what had been a uniform rate levied on issuers for Cirrus-routed transactions and makes the previous flat rate the new top tier. The new pricing system also includes a marked increase in the "support fee" leveled on ATM acquirers, which jumped from 5 cents to 18 cents for every transaction routed over the Cirrus network.
According to ATM industry consulting firm Tremont Capital Group, which was commissioned by the ATM Industry Association to study the potential business impacts of MasterCard's new fee structure, ATM industry ISOs stand to lose between $19.7 million and $25.6 million annually as a direct result of the changes. According to Tremont, about 17 percent of U.S.-based ATM transactions flow through Cirrus.
"As you look at the pattern that's occurred since MasterCard and Visa have gone public, they've continued to raise their fees to the merchants and, in this case, to the ATM owners," said Ken Musante, President of Eureka Payments LLC. The 13-cent fee increase is "huge," he added.
Under MasterCard's new pricing system, banks that issue Cirrus-enabled debit cards on a large scale pay the lowest interchange rate; medium-scale issuers of such cards pay an in-between rate; and small-scale issuers of the cards dish out the highest rate. This highest rate had been MasterCard's across-the-board rate under the previous, single-tiered system.
That rate is 50 cents per transaction, while the new middle- and lower-tiered rates are 45 cents and 35 cents per transaction, respectively.
Why these lowered rates are a detriment to ISOs relates to the flow of money in the ATM niche, where interchange moves in reverse to its usual course. Rather than receiving interchange, as they normally do in the bankcard sector, issuers in the ATM business pay interchange fees to ISOs, merchants and other acquirers (that is, ATM owners).
The reasoning behind MasterCard's tiered system is that banks will be motivated by the prospect of lower fees to issue more Cirrus-enabled cards. But the incentive-based system will almost certainly work against acquirers, who lose in interchange money what issuers save.
"The card networks want issuers to issue their cards, and where they see an opportunity to push interchange to the favor of their card issuer, they will do that," Musante said.
ATMs can connect to certain networks and not to others. According to Don Apgar, Senior Vice President at ISO and ATM service provider Payment Alliance International, the possibility of some acquirers boycotting the Cirrus network is "a hot topic right now." But he said acquirers who do that risk losing the business of customers whose ATM cards only travel over Cirrus (or Cirrus and other select networks not connected with a particular ATM, which would then rely on Cirrus for that transaction).
In any event, MasterCard's decision is risky because ATM transactions are usually routed, by electronic switch, to the connecting network that provides acquirers with the highest interchange, according to Apgar. He said some transactions that would have normally run over Cirrus may now be routed to a more lucrative network, adding that there are "at least a dozen" electronic funds transfer networks for routing ATM transactions.
The transaction volume MasterCard stands to lose depends on how its old interchange rates measured up to other network providers, Apgar said.
The old MasterCard rates may have been comparatively low, in which case the estimated 17 percent of ATM transactions routed over Cirrus were presumably mostly linked to ATM cards enabled only for that network. But if its old rates were competitive, MasterCard risks losing business to other network providers whose rates could have jumped MasterCard's after it changed its fee system.
"That's the million dollar question: Is that 17 percent already the bottom line number, or is there room to move more business off of MasterCard at this point?" Apgar said.
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