Fixed Interchange Fees Hit U.S. Transit Agencies Hard, While Other Merchants Can Soften Blow

A wide range of U.S. merchants pay the same fixed debit card fees based on interchange, including supermarkets, gasoline stations, restaurants and hotels. But transit agencies accepting open-loop payments appear to be among the hardest hit by these fees because of the low value of most of their transactions.

One consultant with a focus on U.S. interchange told Mobility Payments that most U.S. merchants can lessen the impact from the fixed fees when their customers tap regulated debit cards because the merchants have a range of transaction amounts.

“They’ll have smaller goods that are under $5, goods that are under $15, and then they’ll have many goods that are $30, $40, $50, $60, $80, $100, $150,” Joshua Pynn, strategic insights consultant at U.S.-based CMSPI, an independent payments consulting firm. “And normally in the conversations we have, regulated debit, because it is fixed, or the large majority is fixed, the increased costs that they might face for those smaller-ticket transactions as a percentage would be offset by the much lower costs they would be incurring on a $150 transaction.”

But transit agencies, unless they broadly aggregate transactions, have to pay a high percentage of the transaction amount in merchant fees based on interchange–sometimes as much as 6% or more. This money goes to the banks that issued the cards their customers tap to pay.

While there are hundreds of interchange categories controlled by the payments schemes, such as Visa and Mastercard, the biggest problem for transit agencies comes when customers tap regulated debit cards to pay for fares on board buses, for light rail or other transport modes.

These cards covered by federal legislation known as the Durbin amendment, which generally decreased the bite from debit interchange for merchants after it was adopted in 2010. But the law allows banks to charge a fixed fee of $0.21 plus $0.1 for fraud protection, in addition to a small variable charge of 0.05%., or 5 basis, points on the amount of the transaction.

CMSPI estimates that regulated debit cards–issued by banks with $10 billion in assets or more–make up around two-thirds of total debit cards on issue in the U.S.

For that $150 transaction, the fixed fee amounts to little, but on a $2 single fare, it’s significant, especially since debit cards are more popular than credit in the U.S., in particular for low-value transactions.

Interchange makes up the largest share of bank card fees U.S. agencies pay to accept open loop. But it is not the only fee. Agencies also must pay acquirer-processing fees and network assessment fees.

The debit transactions for transit agencies are usually grouped as “small-ticket” transactions on the merchant billing statements the agencies receive. This grouping is believed to make up a majority of open-loop transactions for most U.S. agencies. Payments schemes like Visa generally define small ticket for agencies and all other merchants as transactions valued at $15 or less.

Visa Interchange Cut Comes with Limitations
As Mobility Payments has reported, Visa recently lowered interchange on a portion of these small-ticket regulated debit transactions–those for $5 or less. Visa’s new interchange category, targeted specifically at transit agencies accepting open loop, lowered the fixed fee from $0.22 to $0.02; while slightly increasing the variable rate from 0.05% to 2% of the transaction amount.

That has helped lower the banking fees for at least some U.S. agencies. For example, if open-loop fare payments in this interchange category averaged $3, agencies would be paying 7.8% of the fare in interchange at the old rate and 2.7% of the fare in interchange at the new rate.

Of note, however, is that Visa chose not to lower interchange on regulated debit transactions above $5, even on those between $5 and $15, which are also considered as small ticket. For transit agencies that aggregate transactions in particular, there are still a lot of transactions that would not be covered.

In addition, Visa apparently has left all its other interchange and network fee categories unchanged.

Moreover, Visa, which is not talking about its interchange cut, has not yet made the change permanent. The payments network is believed to have set it to last for three years, after introducing it last November, as Mobility Payments has reported.

The fact that the new transit interchange rate isn’t a permanent change appears to be borne out by the fact that Visa did not include the new rate for transit agencies in its recently issued interchange fee update.

Lower fees in Europe
CMSPI’s Pynn pointed to the lower interchange rates in Europe, which have benefitted such transit authorities as Transport for London and the success of its open-loop payments service. Like other merchants, transit agencies in Europe pay only .2%, or 20 basis points, on debit transactions; and .3%, 30 basis points, for credit. That means the debit interchange rate in Europe is still 10 times lower than Visa’s new, lower debit interchange rate for fare transactions of $5 or less.

Besides being “immensely popular” among Transport for London’s  customers, the open-loop service has “led to a huge increase in retail contactless transactions in the UK, as well,” Pynn said. Many other transit agencies, including those in the U.S. are watching, some no doubt hoping to emulate the London agency’s success, he said.

“But in the UK, 20 basis points to accept an open-loop debit card is a much more attractive rate certainly for businesses than the fees charged in the U.S.,” he said. “They’re (U.S. agencies) often stuck between a rock and a hard place, as they don’t want to turn customers away. Cards–which are expensive to accept here in the U.S. versus Europe–are the predominant way people want to pay.”

Pynn’s colleague, Callum Godwin, CMSPI’s chief economist, noted that roughly around the time Transport for London was rolling out debit and credit card acceptance about eight years ago, interchange fees were being capped in Europe–including the 0.2% for debit. Debit cards are used much more often than credit cards to pay for fares by riders in the UK, he added. These lower interchange fees could have been one reason Transport for London’s chose to undertake its open-loop rollout.

“For debit, for example, the interchange fee went from 8 pence (US$0.12) per transaction down to 0.2%, which obviously, on the London Tube, where the great majority of transactions are going to be low, was a significant savings,” he told Mobility Payments.

‘Overall Swipe Fees Continue to Grow’
Interchange fees are going up for U.S. merchants, in general, notes the Merchants Payments Coalition, a retail group that is highly critical of the interchange system in the U.S.

It noted that Mastercard and Visa followed through last month with interchange increases they had delayed because of the pandemic, despite opposition from a group of U.S. lawmakers. The increases, estimated to add hundreds of millions of dollars to merchant costs, came mainly to credit and online purchase fees, not to fees expected to affect transit agencies much.

The retail group, when asked if it welcomed Visa’s interchange cut for transit agencies, even with the limitations, took a skeptical view.

“Even when Visa or Mastercard offer a rare decrease in a specific category like transit, overall swipe fees continue to grow,” said spokesman J. Craig Shearman. “If swipe fees for transit go down by a few pennies per ride, card companies and banks are likely making it up elsewhere, and commuters will still pay hundreds of dollars a year everywhere where they use their credit and debit cards.”

He added that even if Visa were to apply the interchange cut it is offering to transit agencies on transactions of $5 or less to all merchants, it wouldn’t make much of a difference.

“Very few merchants see very many transactions that small,” Shearman said. “Significant savings would require significant reductions for all transactions, not just a few.”

Neither Visa nor Mastercard responded to multiple requests for comment.

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