Analyst Note: Visa, MasterCard may hike debit cost

AP News
Posted: Sep 21, 2011 6:11 PM
Analyst Note: Visa, MasterCard may hike debit cost

The price of small purchases on debit cards could soon rise sharply _ for merchants, that is.

Visa Inc. and MasterCard Inc. are reportedly planning to dramatically raise the fee charged to merchants for small ticket items, according to Janney Capital Markets analyst Thomas McCrohan.

Today, a merchant pays about 8 cents to the card networks to process the purchase of a $2 cup of coffee, but McCrohan said the two companies are planning to spike that to 23 cents.

That will "kill the economics for small ticket debit purchases and influence a shift back to credit cards," he wrote in a note to clients.

The fees that merchants pay for credit card transactions were not addressed in a new regulation limiting debit card fees to roughly 24 cents per transaction, regardless of the total price of the purchase. The new rule takes effect Oct. 1.

Hiking small transaction fees that high "will almost certainly lead to a merchant revolt against the card networks," McCrohan wrote.

Visa and MasterCard declined to comment on the matter. MasterCard said in July it is implementing a two-tiered pricing structure on debit, but did not publicize details. Visa said it will use a series of strategies, such as reducing some fees charged to handle debit purchases and fixing other fees that are now variable, to make its network more appealing to merchants. It has not publicized specifics.

McCrohan offered three suggestions for why the card networks might hike the fees:

_ to help the banks that issue cards bearing their logos recoup lost revenue that will result from the regulation limiting debit card fees.

_ to push merchants to accept mobile payments and consumers toward using new technology known as mobile wallets, which aim to make it possible to use cellphones like cards by tapping their phones on wireless-capable payment terminals, instead of swiping a card.

_ in response to a longstanding merchant lawsuit over the fees they are charged for processing payments, which McCrohan said is rumored to be near a settlement.

Whatever the reason, McCrohan said, "this pricing change demonstrates the risk to small ticket merchants that accept debit cards."

Such a hike could pose problems for the operators of self-service kiosks like DVD rentals, which would have to deal with a big increase without alienating customers, the analyst said. It also risks alienating important merchants like Starbucks Corp. that rely on small purchases, he said. "These operators will be violently opposed to this price change," and could slow down their investments in new technology needed to accept mobile payments in response, McCrohan said. It will also "reinforce merchants' view that the networks are not friends of merchants."

Visa shares closed down $1.42, at $91.42. The stock has ranged between $66.50 and $9475 in the past 52 weeks, and is up 9 percent since the start of the third quarter.

MasterCard shares, up 13 percent since the start of the quarter, closed down $12.81, or 3.6 percent, at $340.97.

(This version CORRECTS Removes reference to plans to raise fees in 7th paragraph, tightens. Corrects spelling of Starbucks in penultimate paragraph.)