The average interchange rate in the US has increased by 22% in ten years, yet total actual fees charged to merchants, including interchange, have only increased by 11% (see Aite Group report, An Acquiring Paradox: Discounts Are Squeezed, But Spreads Are up). Acquirers appear to have swallowed a large portion of the increased interchange by lowering their own transaction fees, presumably in response to merchant pressure. It’s tough being on the front lines.
“Back in 1995, the average discount rate, or the charge to merchants for card processing as a percent of the sale, was 1.87%, with 1.4% for interchange and 0.47% for the acquirer. Interchange is a component of gross revenue that acquirers must pass on to card issuers, so the acquirers’ share of discount revenue was 25.1%. In 2004, the average discount rate was 2.08%, with interchange accounting for 1.71% and acquirers’ revenues 0.37%. That means the acquirers’ share was 17.8% of discount revenue.”
Why have acquirers agreed to this? Do they enjoy being squeezed? Obviously not. Some have managed to work their way around the problem. The Aite report points out that some acquirers have compensated by adding administrative fees, application fees, statement fees, and lots of miscellaneous fees. So merchants now pay for things that used to be free, or rather were implicitly included in the acquirer’s transaction fees.
As interchange gets challenged and cut around the world, acquirers may have more room to breathe and may be able to further develop services to merchants, for additional fee revenue of course. When interchange goes down dramatically, some merchants could be willing to spend more on other services provided by an acquirer. These merchants would be spending less overall than they were in the past with full interchange, yet they would be getting more value out of electronic payments. Basically, they could be enjoying lots of new services for free. In this scenario, the value would come from acquirers, not issuers, and would be reflected in the acquirer’s portion of revenues, not interchange.
Here’s a wild idea. Imagine that an acquirer provides a new service that helps merchants encourage customers to use their debit cards rather than mileage heavy credit cards. An automated steering feature. Merchants benefit by cutting the overall cost of payment processing, since there would be fewer high interchange transactions. The cut in costs could more than justify merchants paying an additional fee for the acquirer’s service.