The irresistible attraction of higher interchange is leading to mass issuance of premium cards, which could quickly result in even greater merchant anger and resistance, and cause merchants to increasingly resort to surcharges and whatever other steering tactics they can use.
The attraction is irresistible. Why issue a low interchange card product to a customer who also qualifies for a premium card? Visa and MasterCard are making it easier for banks to issue high interchange cards by launching new premium products (which also reduces the risk of banks converting over to American Express). Visa just announced their new Signature Preferred credit card, which will give banks an average 2.27 percent interchange, much more than the 1.99 percent rate on a typical high-end card from Visa. In comparison, American Express charges merchants an average 2.55 percent of a transaction.
The promise of higher interchange is causing card issuers to offer premium cards with no annual fees, so as to attract a maximum number of customers. The process is so simple and the attraction of higher interchange is so strong, that it is difficult to imagine why an issuer would not want to upgrade as many cardholders as possible, the more the better. Could entire card portfolios be switched over to premium products? Some card issuers are certainly going to try! It's just too irresistible. Why not convert an entire credit card portfolio? It makes perfect financial sense.
Of course, merchants will naturally become more and more reluctant to accept high end cards. They will increasingly resort to surcharges and whatever other steering tactics they can use. Visa and MasterCard's new premium card products will need to take this into account. New premium products will need to focus more on satisfying merchants, so merchants will not react violently to mass issuance of premium cards.
American Express has always had to deal with this problem, but it will get much worse as merchants see a much larger portion of sales being performed at high interchange rates. When only a few customers use a high end payment card, the total fees paid by the merchant are not very significant. Once they become significant, everything changes.