Universal Processing
May 28, 2021
Updated: Sep 27, 2023
Visa and Mastercard quietly made significant increases to card swipe rates in April, 2021. These changes are projected to cost business owners a staggering $1.17 billion per year. We break down the winners and losers of the new changes and the best ways to offset your increasing processing costs.
In 2020, Visa and Mastercard announced plans to restructure interchange fees for the first time in over a decade. All told, the planned changes would cost merchants over a billion dollars in additional processing costs. At the time, the announced rate increases were already controversial.
With the economic upheaval caused by the pandemic, Visa and Mastercard delayed the scheduled changes by a year to April 2021.
In March 2021, lawmakers and trade associations pressured the payment networks to reconsider the impending fee increases. Senator Durbin (D-IL) and Congressman Welch (D-VT) issued a joint letter to the card networks. Their letter urged the companies to call off the fee increases. “Our nation is still reeling from the ongoing pandemic.” The letter also criticizes the disproportionate impact of the fee increases on online transactions, straining an essential lifeline for businesses during the pandemic.
On March 16, 2021, both Visa and Mastercard announced that they would once more delay the rate changes.
Mastercard: “Mindful that some merchants are still facing unprecedented circumstances, we are delaying our previously announced interchange adjustments,”
Visa: “Visa is committed to maintaining stability in our payments system and will not make any future rate changes in the U.S. for another year while the economy recovers.”
Despite their earlier statements, both companies proceeded with the majority of the planned changes in April. These changes include the most controversial and costly fee increases. In the next section, we will explore the types of transactions affected and the changes to your processing costs.
The largest changes found in the Visa and Mastercard’s recent fee restructuring involve significant increases in CNP or "card not present" transactions. This means that any transaction where the physical credit or debit card is not dipped, tapped, or swiped will fall under the CNP classification. The types of affected transactions are surprisingly common.
Online e-commerce transactions
Online website transactions
Mobile app-based payments
Automatically scheduled payments
Electronic invoicing
Orders taken over the phone or otherwise manually entered
The ubiquity of these forms of transactions means that nearly every business will be affected by the fee increases. If you're unsure if any of your transactions will be affected, you can ask your payment processor.
For the few equipped to interpret the complexities of interchange rates, here are the official rates as of April 16, 2021, for Visa and Mastercard. For the rest of us, an example may be more helpful.
For a traditional Visa card, the fee on a $100 transaction will climb to $1.99 from $1.90. For premium Visa cards, the fee will rise to $2.60 from $2.50
In the example above, the increases represent a 4.7% and 4% increase respectively. Though the fee increases may sound unassuming at first glance, they add up. After all, interchange accounts for roughly 70 to 85 percent of a merchant’s total processing expense.
Analysts at CMSPI have estimated that Visa’s cost structure changes will result in an $842 million annual increase in merchants' processing fees. Meanwhile, the changes implemented by Mastercard are estimated to cost merchants an additional $329 million annually. All told, these changes will cost merchants over $1.17 billion each year.
The changes also continue a trend of increasing complexity in processing interchange fee structures. This is problematic for merchants who must navigate these fee structures to optimize their interchange rates and minimize their processing costs. Universal Processing optimizes these interchange categories as part of our onboarding process so our clients can rest assured that they have the best possible rate on their processing fees. If you’re unsure about your processing rates, you can submit a copy of your statement for a free cost-savings analysis by reaching out to marketing@uprocessing.com or your payment processing provider.
Not all businesses will be affected equally by the changes. Businesses with specializations in health care, education, and real estate may see a reduction in processing fees - a result of Visa’s push to boost card acceptance in these industries.
For some fee programs, Visa is removing the per-item charge for interchange fees, opting instead to focus on the ad valorem (%) fee.
With the change, retailers and restaurants (particularly quick-service restaurants) with small ticket sizes will see a reduction in processing costs. Conversely, full-service restaurants, with higher average ticket values will be negatively impacted.
Even before the recent fee increase, CNP transactions have demanded a higher interchange fee because of their higher associated chargeback risk. Chargebacks can be a nightmare for merchants. Not only are merchants on the hook for returning the transaction value in question, but they must also shoulder the original costs associated with the product or service in question. In addition, chargebacks will cost merchants an additional fee ranging from $20 - $100. A 2019 LexisNexis research study found merchants incur $3.13 in costs for every dollar of chargeback fraud.
Though every business will inevitably face some chargeback disputes, you can help insulate your business by taking a few precautionary measures.
Avoid fraud by following best practices for safety and identity verification. Security measures such as the address verification system (AVS) and collection of the card verification value (CVV) should be used as part of every transaction.
To prevent erroneous disputes, provide clear and accurate descriptions of your goods and services and ensure descriptions used on billing statements are easily recognizable.
Offer dissatisfied customers healthy alternatives. Make sure that customers can easily access responsive customer service and a comprehensive return policy. Facilitating a quick return or exchange will cost you far less than a payment dispute. Plus, you'll increase customer satisfaction and retention.
You can also reduce offset the additional fees by promoting less expensive card-present transactions. Despite digitization trends, consumers still prefer brick and mortar. Promote in store traffic by leaning into the factors that customers love about the in-person retail or business experience.
Allow customers to reserve online and pick up and pay in-store.
Provide local inventory availability online to encourage foot traffic to your business
Offer seamless and convenient in-store returns and exchanges
If your brick and mortar business acts as a showroom, offer free shipping from the store.
Convert app users with in-store exclusive items and promotions.
Host special in-store events and workshops.