Visa Quietly Lowers Interchange for Transit Agencies in California but Scope of Reductions Limited So Far

Visa has quietly introduced a new interchange category for transit agencies in California, Mobility Payments has learned. If rolled out nationally and across more card types, the changes could substantially reduce the high fees that agencies pay to accept credit and debit cards for fares.

Sources say Visa’s interchange reduction seems to be confined to California for now and is for a limited time. One small agency head in the state told Mobility Payments he learned that Visa’s “special program” was set to last for three years. He didn’t know if Visa planned to offer the lower transit interchange category in other places in the U.S. Transit agencies are trialing open-loop payments in California under a state-sponsored program.

The interchange reductions target regulated debit card transactions under $5, a card type that hits transit agencies especially hard because they must pay a fixed fee of $0.22 on each of their low-value transactions. That has pushed total merchant fees based on interchange that agencies must pay to 6% or more of open-loop revenue, not counting other bank card fees, according to agency billing statements viewed by Mobility Payments.

Mobility Payments confirmed the lower interchange fees for a new Visa mass transit or transport interchange category from a recent merchant billing statement from one transit agency in California, Monterey-Salinas Transit. The new fee category accounted for by far the most open-loop transactions during the month. (See below for highlights of the statement.)

But not all of the interchange fees for regulated debit cards are lower than before. Transactions above $5–occurring when customers ride enough times get daily fare caps–carry the same high fixed fees. Because of the higher transaction values, however, total fees based on interchange dropped to around 3.7% overall for the month. (See bank fees summaries on this page.)

Meanwhile, another source told Mobility Payments that Mastercard has either changed or plans to reduce fees for mass transit transactions, along with parking. Like Visa, the change is apparently coming to certain regulated debit cards, said the source. It’s not clear where Mastercard might be offering the lower interchange. The changes did not appear on the latest statement from Monterey-Salinas Transit.  

Representatives from Visa and Mastercard involved in transit payments did not respond to multiple requests for comment or confirmation on the changes, and spokespersons for the payments networks also did not respond. Elavon, the merchant acquirer for at least two of the California open-loop trials, declined to be interviewed.

It remains to be seen how far the payments networks will reduce interchange that apply to credit, debit and prepaid cards used by customers directly at the gate and on board buses to pay fares. Some backers of open-loop payments said they believe Visa and Mastercard will roll out the reductions more widely across card types and geographies in the U.S. after long resisting the moves.

‘Visa…Has Been Less Helpful’
But with the reductions apparently limited in scope so far, U.S. transit agencies still will pay many times more than their counterparts in Europe to accept the open-loop contactless cards and credentials in NFC wallets. In Europe, regulators have capped interchange at .2%, for debit cards and .3% or credit, or 20 to 30 basis points, for all types of transactions.

By comparison, some transit agencies in the U.S. have been paying 8% or 9% of their open-loop revenue just in banking fees. One is TriMet of Portland, OR, which introduced open-loop payments in 2017, according to records obtained by Mobility Payments. (See table on this page.) Interchange makes up at least two-thirds of bank fees, with acquiring fees and network assessment fees accounting for most of the rest. That’s in addition to other fees and capital costs, such as new validators, that agencies must fund to accept open loop.

David Leininger, who was interim president and CEO of Dallas Area Rapid Transit in the run up to DART’s launch of open-loop payments last September, told Mobility Payments that while there has been some movement in recent years by the payments networks to carve out a lower interchange rate for transit agencies, there has not been nearly enough progress. The payments networks set interchange rates.

“The key is Visa, the dominant player in the space,” he said. “To date, they have been less helpful than the (transit) industry would have preferred. The card companies love the idea of open payments because of the expectation of more volume. Unfortunately, they are not offering much incentives to transit agencies to facilitate the goal.”

Al Putre, who oversaw the rollout by New York’s Metropolitan Transportation Authority of the large OMNY open-loop payments service, when asked by Mobility Payments about bank card fees, said “all agencies believe they are high!” Putre, who retired last year, declined to say what he would tell payments networks about interchange fees, saying only that he could add “nothing that they don’t already know.”

Lobbying from State of California?
Leininger and Putre were not commenting on the most recent changes, including Visa’s new transit category for regulated debit cards covering transactions of less than $5 in California.

According to the February 2022 merchant billing statement from Monterey-Salinas Transit, which is trialing open-loop payments, even with the reductions, interchange still made up a little more than 3.6% of total open-loop revenue for the month. And counting acquiring fees from Elavon and network assessment and associated fees from Visa and Mastercard, the total bank card fees would have amounted to 5.7% of the transit agency’s $9,681 in open-loop revenue for the month.

The agency, however, did not have to pay these fees for February because it received a refund of $ 939.07 as credit on the billing statement. Monterey-Salinas Transit’s CEO and general manager Carl Sedoryk said Visa actually put the special interchange program for California into effect in November, but the billing statements did not reflect the changes until last month. The refund covers past interchange reductions not applied at the time.

Monterey-Salinas Transit, based around 100 miles south of San Francisco, was the first agency to launch a trial under of the California Integrated Travel Project, or Cal-ITP. It’s part of a program of the state’s Department of Transportation, known as Caltrans. The state, through the separate Department of General Services, or DGS, has contracted with vendors to help transit agencies procure the core technology they need to roll out open-loop payments.

Although Sedoryk said he has no direct knowledge of any agreement between Visa and state officials to lower interchange, he believes lobbying from Cal-ITP and other officials may have encouraged Visa to set up the special interchange reduction. Visa has been a supporter of the Cal-ITP program, in general.

Sedoryk said he’d like to see Visa expand the interchange reductions and for other payments schemes to join in. (He said he had no knowledge of a parallel interchange reduction offered by Mastercard in California).

“It would be a great benefit to these public transit operators and their customers across the country if the various payment schemes, Visa, Mastercard, American Express and Discover, were able provide the same reduced interchange rate at a national level, as it would likely hasten the adoption of this technology,” he told Mobility Payments.

Sedoryk added that even with the limited interchange reductions so far, the costs of open-loop payments stack up well against other methods of fare payments.

“As a comparison, we have estimated that our costs of supplies, repairs, labor, depreciation, etc., on our traditional farebox system that collects currency and issues closed-loops cards runs about 14% of each dollar collected, which is about average for the industry.”

Targeting Regulated Debit
The reductions by Visa and purportedly by Mastercard target regulated debit cards that have proved to be a thorn in the side of U.S. transit agencies.

The cards are considered regulated because they are issued by banks that have $10 billion or more in assets, so fall under the Durbin amendment. This U.S. federal law caps interchange rates for debit cards at a fixed $0.21 per transaction, with an additional $0.01 allowed for fraud protection, plus a small variable fee of .05%. The fixed fee does not amount to much on the purchase of a computer or new set of tires, but it’s significant on a $2 or $3 transit fare.

Visa’s new mass transit category reduces that fixed fee from $0.22 to only $0.02 per transaction while the variable fee increases from .05% to 2%. That’s as long as the transaction remains under $5. So on that $2 transit fee, the merchant fee based on interchange the agency would pay would decrease from $0.23 to $0.06.

Visa did not reduce these fixed fees for transactions over $5. So Monterey-Salinas Transit still had to pay high fixed fees on a significant share of sales in the mass transit category. But the share of interchange out of total revenue for these transactions was just 3% instead of more than 6% without the change. (Interchange, which acquirers transfer to card issuers, is the main component of the fees merchants, including transit agencies, pay.)

A transit agency can record higher transaction amounts because of daily fare capping or other aggregation of transactions. While many agencies support fare capping, if a particular cardholder isn’t a regular user of public transit and doesn’t tap multiple times during the aggregation period, the transaction amount would likely remain under $5.

In addition, Visa did not reduce interchange on such other categories as small-ticket regulated debit. This category alone amounted to 12.4% of Monterey-Salinas’ February open-loop sales. The small agency had to pay fees based on interchange amounting to 6.4% of the open-loop sales in this small-ticket category. The Visa change also doesn’t apparently include credit cards, which usually have lower total fees for low-value transactions.

Meanwhile, the source said Mastercard’s change for regulated debit cards reduces the fee from $0.22 plus 0.05% to a fixed fee of around $0.04 and a variable rate of 1.55%. This lower Mastercard fee could not be immediately confirmed. And it did not show up on the Monterey-Salinas Transit February statement.

While the reductions in interchange in the U.S. for transit agencies are limited in scope, and the payments networks have not sought to publicize them, at least one open-loop payments technology supplier said he believes the changes could signal broader changes ahead for interchange in the U.S.

“I’m hopeful that it’s the beginning of a national recalibration of interchange to allow for tap to pay to grow in the same way it’s growing across the rest of the world,” Paul Griffin, global head of commercial for UK and Australia-based Littlepay, when asked by Mobility Payments about the interchange reductions in California. Littlepay serves as a payments service provider for open-loop fare projects in several cities in Europe and also in California.  

“The card schemes are definitely working towards making contactless as available to the market as it is in Europe, and the only way to do that is to reduce the cost of these transactions to small-ticket values, because they’ve become artificially high after (the) Dodd-Frank (act) and the Durbin amendment,” he said. “So we will see these moves, and it’s great to see that it’s already starting in transit and in California.”

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