MasterCard Changes Interchange Procedures, Reaches Out to Merchants; Do Market Changes Loom?

PURCHASE, N.Y. – MasterCard International has changed the procedures it uses to set its interchange rates as part of a package of changes industry watchers say could help the brand situate itself for coming shifts in the credit card industry. The brand’s interchange procedure change is small but potentially far reaching. Under previous procedures MasterCard’s Board of Directors, which includes many large issuers, approved interchange recommendations that the association’s staff generated. Going forward under the changed policies, the Board will not approve those interchange rate changes. Sharon Gamsin, spokeswoman for MasterCard, said the change would have little impact on the core of the procedure by which the association has set interchange rates in the past. “MasterCard has staff dedicated to evaluating the competitive environment and balancing the needs of our issuers and our acquirers,” Gamsin said, adding that those processes and procedures would continue. Each year a MasterCard committee reviewed cost data of issuers compiled and submitted to it by an independent third-party consultant, according to a statement the card brand released. This study historically considered certain costs of issuing MasterCard-branded transactions but did not attempt to include all costs that MasterCard issuers incur (e.g., cardholder solicitation, marketing and loyalty program costs). The cost study was only one factor taken into consideration. Staff in its recommendations also took into account market considerations including competitive pressures from other payment methods, long-term trends in costs, the need for investment in new technology, and the need to provide incentives to members and merchants to increase the efficiency of the system for the benefit of all participants in the system – issuers, acquirers, merchants and cardholders, MasterCard explained. The results of the cost study, and the views and recommendations of the committee and staff were then presented to the MasterCard Board of Directors for their approval. All of the other procedures remained the same, Gamsin said, and only the Board approval had changed. Gamsin said she could not say how often, if at all, MasterCard’s Board has rejected or changed the staff’s interchange recommendations because the association does not comment on what happens in its board meetings. But some MasterCard issuers have expressed reservations about the changes since they would appear to take the issuers’ perspective out of a pretty high level of the process. “We would definitely share other issuers’ concerns about the possible loss of perspective and input,” said Patrica Anz, assistant vice president for the $2.1 billion Randolph Brooks FCU, headquartered in Universal City, Texas. Randolph Brooks valued its exclusively MasterCard portfolio at $90 million in its most recent report to NCUA and Anz explained that the institution took possible interchange changes seriously. But some industry analysts and executives have speculated that the interchange policy change is only part of an overall MasterCard effort to strengthen its position with merchants in light of what could be the biggest change to hit the credit card industry in years, the ability of issuers to offer American Express. The analysts point out that MasterCard put the interchange policy change in the context of other changes which appeared designed to make the card brand more popular with the merchants who accept it. Among the changes are upgrades to MasterCardmerchant.com, a Web site which provides merchants with information about co-branding; preventing fraud; new technologies; and brand standards, the association said. The association also published a merchant manual which will include the minimal rules and procedures that MasterCard expects its merchants to follow. Previously, MasterCard expected its transaction acquirers to keep their members up to speed on its rules and, sometimes, add additional or more stringent rules. Now, a merchant will be able to download the minimal rules from MasterCard’s site. The brand has also begun using the name of merchants in its successful “priceless” advertising campaigns. “We recognize the growing voice the merchant community has in the payments industry today, and believe that both merchants and consumers will benefit if we can provide merchants with a better understanding of the rules and procedures, as well as the benefits and efficiencies related to MasterCard acceptance,” explained Fred Gore, senior vice president of acceptance for MasterCard. MasterCard might want to reposition itself, the analysts suggested, because the overall credit card industry will face the arrival of what in effect would be a third credit card brand when issuers are finally allowed to issue American Express and Discover along with VISA and MasterCard. Currently the anti-trust case between the U.S. Justice Department, VISA and MasterCard which seems likely to allow that to happen is before the U.S. Supreme Court, and analysts expect that the U.S. Justice Department will prevail. When it does, the analysts suggest, VISA and MasterCard will face much more competition in an industry whose overall credit card options in effect double in a very short amount of time. “I think it very likely that the Justice Department will prevail in this case because I have seen nothing, so far, which suggests otherwise,” said David John, a banking analyst with the predominantly conservative Heritage Foundation, a think-tank headquartered in Washington D.C. “And when it does, credit cards will become more of a utility than ever,” John added. “In the future, credit cards will become part of the staple services this economy needs, like electrical power, water and telephone service.” When that happens, John suggested, the companies that survive will be the ones that have both the most widespread acceptance and the greatest numbers of loyal cardholders. But David Becker, CEO of OneBridge, a card processing firm with about 30 credit union clients headquartered in Indianapolis, Indiana, reported that while MasterCard seemed to be repositioning itself in the market, he found it difficult to discern what the eventual goal might be. Becker reported that his firm had two credit unions abandon MasterCard for VISA after the number two card brand declared in April of 2004 that card issuers had to generate at least $250,000 per year in business with the association in order to be able to keep issuing independently. Small issuers that fell below that threshold had to find a sponsor or issue in an associate capacity, MasterCard said. “I can’t tell if they have decided that they don’t need small issuers or if they want to cut what they perceive to be underperformers,” Becker said. “But it’s odd that at time when big industry changes appear to be looming, MasterCard is tightening down on some rules when they should be easing them and becoming more flexible.” But whether or not MasterCard succeeds in readying itself for the arrival of other card brands, it is clear that some of its credit union issuers are thinking about it. Anz reported that while Randolph Brooks hadn’t studied the issue in depth, the credit union was definitely aware of the opportunity to issue American Express cards which might be coming down the pike. “We would have to survey our members to get a better feel for the demand,” Anz said. “But if a big enough percentage of our members held both our MasterCard and American Express cards we would definitely look into offering them ourselves and have both cards in our members’ wallets.” -