Summary

In order to meet its November 4, 2014 commitment to reduce its average interchange rate to 1.50%, MasterCard is reducing rates on all consumer credit cards in all merchant categories. The new rates will come into effect between April 1, 2015 and May 17, 2015 (the latter for structural changes) and can be expected to be in effect for a period of five years.

The largest rate reductions are found in two areas:

  • Interchange rates on High Spend cards will be reduced for most merchants by between 7% and 11.5% from current levels. Smaller rate reductions will be made on Core (i.e., standard) and Premium High Spend cards.
  • A new Independent Business in Everyday Spend category will see reductions of 22% on High Spend cards, compared to rates in the current Consumer Electronic category, with smaller reductions on Core and Premium High Spend cards. This change will benefit merchants in 24 Merchant Category Codes “MCC” (see Table 1 for full MCC list).

Although MasterCard has marketed this new Independent/Everyday category as being focused on small businesses, it benefits any retailer within the 24 MCC codes with MasterCard volumes under $400 million annually, which would seem to encompass qualifying firms with annual retail sales of up to $2.5 billion and higher in some cases.

Background

On November 4, 2014, agreements were announced by each of Visa and MasterCard to reduce their respective interchange rates on consumer credit cards from current levels to an average of 1.50%. These reductions will initially be for a period of five years, commencing April 2015.

For Visa, this means a 7% reduction in its current average rate (down from 1.61%). For MasterCard, this means a 14% reduction in its current average rate (down from 1.74%).

The government has announced these two agreements, taken together, as being a 10% reduction, whereas RCC calculates its overall impact as a 9.3% reduction from current levels. Over five years, merchant savings will amount to approximately $1 billion on MasterCard and a further $1 billion on Visa.

In order to achieve an average rate of 1.50%, MasterCard has had to reduce pricing on most of its core products and in most segments. MasterCard has to reduce fees twice as deeply as Visa and will, in addition to reductions on its core products, offer incentives for a new Independent Business in Everyday Spend category. The bulk of its reductions will still come from MasterCard’s core products.

New Rates

On April 1, 2015, rates for all card types and merchant categories will be reduced. Rates for petroleum and supermarket are listed separately. Note that the former MasterCard Tier 1 category becomes Tier 2 under the new system, with a new Tier 1 threshold level of $3 billion in MasterCard spend being introduced by May 17, 2015 (discussed in greater detail later on this page).

New Tier 2 (MC spend >$1 billion)

Core High Spend Premium High Spend
Current to April 2015 Tier 1 >$1 billion MC spend 1.40% 1.60% 2.00%
April 1, 2015 Tier 1 >$1 billion MC spend 1.36% 1.48% 1.96%
Reduction in basis points 4bps 12bps 4bps
Reduction % of current rate 2.86% 7.50% 2.00%
New Tier 3 (MC spend >$400 million)

Core High Spend Premium High Spend
Current to April 2015 Tier 2 >$400 million MC spend 1.45% 1.65% 2.00%
April 1, 2015 Tier 3 >$400 million MC spend 1.41% 1.53% 1.96%
Reduction in basis points 4bps 12bps 4bps
Reduction % of current rate 2.76% 7.27% 2.00%
Consumer Electronic (a.k.a. card-present transactions)

Core High Spend Premium High Spend
Current to April 2015 Consumer Electronic 1.59% 2.00% 2.25%
April 1, 2015 Consumer Electronic 1.49% 1.77% 2.12%
Reduction in basis points 10bps 23bps 13bps
Reduction % of current rate 6.29% 11.50% 5.78%
Other MC Transactions (a.k.a. card not present transactions)

Core High Spend Premium High Spend
Current to April 2015 ALL OTHER 1.72% 2.13% 2.65%
April 1, 2015 ALL OTHER 1.61% 1.89% 2.49%
Reduction in basis points 11bps 24bps 16bps
Reduction % of current rate 6.40% 11.27% 6.04%
New Rates for Supermarket and Petroleum (as of April 1, 2015)

Rates have been lowered both for supermarkets and petroleum merchants.

Supermarket (MC Spend >$400 million and >$3 billion)

Core High Spend Premium High Spend
Current to April 2015 Supermarket >$400 million MC Spend 1.36% 1.56% 2.00%
April 1, 2015 Supermarket 1.32% 1.44% 1.96%
Reduction in basis points 4bps 12bps 4bps
Reduction % of current rate 2.94% 7.69% 2.00%
Petroleum (MC Spend >$400 million currently)

Core High Spend Premium High Spend
Current to April 2015 Petroleum >$400 million MC Spend 1.21% 1.41% 2.00%
April 1, 2015 Volume Petroleum 1.17% 1.30% 1.96%
Reduction in basis points 4bps 11bps 4bps
Reduction % of current rate 3.31% 7.80% 2.00%

In addition, the current $400 million threshold for Supermarket and Petroleum rates will be dropped, extending preferred rates to all merchants in grocery and petroleum. These rate cuts are the largest in the overall set of rate revisions from MasterCard.

Supermarket (MC Spend >$400 million currently)

Core High Spend Premium High Spend
Current to April 2015 Consumer Electronic 1.59% 2.00% 2.25%
April 1, 2015 Supermarket 1.32% 1.44% 1.96%
Reduction in basis points 27bps 56bps 29bps
Reduction % of current rate 16.98% 28.00% 12.89%
Petroleum (MC Spend >$400 million currently)

Core High Spend Premium High Spend
Current to April 2015 Consumer Electronic 1.59% 2.00% 2.25%
April 1, 2015 Consumer Volume Petroleum 1.17% 1.30% 1.96%
Reduction in basis points 42bps 70bps 29bps
Reduction % of current rate 26.41% 35.00% 12.89%
New Rate Structure Elements (by May 17, 2015)

MasterCard is also changing its rate structure in several places. Because the Code of Conduct for the Credit and Debit Card Industry in Canada requires that networks provide acquirers with at least 180 days’ notice of any structural change, these changes will take effect after April 17, 2015 but no later than May 17, 2015.

MasterCard is introducing two new Tier 1 categories for merchants with net MasterCard purchase volume greater than $3 billion, one for supermarket merchants in particular. These merchants will see rate reductions of 14% on High Spend cards from current levels.

Merchants with MasterCard purchase volume between $1 billion and $3 billion will be categorized as Tier 2 after May 17, 2015 and Merchants with MasterCard purchase volume between $400 million and $1 billion will be categorized as Tier 3 after May 17, 2015.

Tier 1 (MC Spend >$3 billion)

Core High Spend Premium High Spend
Current to April 2015 Tier 1 >$1 billion 1.40% 1.60% 2.00%
By May 17, 2015 Tier 1 >$3 billion 1.26% 1.38% 1.96%
Reduction in basis points 14bps 22bps 4bps
Reduction % of current rate 10.00% 13.75% 2.00%
Tier 1 Supermarket (MC Spend >$3 billion)

Core High Spend Premium High Spend
Current to April 2015 Tier 1 Supermarket >$1 billion 1.36% 1.56% 2.00%
By May 17, 2015 Tier 1 Supermarket >$1 billion 1.22% 1.34% 1.96%
Reduction in basis points 14bps 22bps 4bps
Reduction % of current rate 10.29% 14.10% 2.00%

Of far broader application, MasterCard has introduced a new category: Consumer Independent Business in Everyday Spend. This category extends preferred rates to a large number of merchants with most transactions currently in the Consumer Electronic category.

Merchants qualifying for the Independent/Everyday category will see sizeable rate reductions:

  • Rates for Core (i.e., standard) credit cards will be reduced by approximately 9%
  • Rates for Premium High Spend credit cards will be reduced by 11%
  • The largest reduction will come on High Spend credit cards, which will see reductions of 22% from current levels.

The Independent/Everyday category is comprised of merchants falling into 24 of the 285 Merchant Category Codes (see Table 1).

Independent Business in Everyday Spend category

Core High Spend Premium High Spend
Current to April 2015 Consumer Electronic 1.59% 2.00% 2.25%
By May 17, 2015 Independent/Everyday 1.44% 1.56% 2.00%
Reduction in basis points 15bps 44bps 25bps
Reduction % of current rate 8.81% 22.00% 11.11%

Merchants who do not qualify for the new Independent/Everyday category and remain in the Consumer Electronic category (see above) will have rate reductions approximately half the size of those for the Independent Business category:

Inclusion and Exclusion from Independent/Everyday

According to MasterCard, it used several criteria for determining the composition of the Independent/Everyday category:

  • Average ticket on a MasterCard purchase under $100;
  • Frequency of spend (not explicitly defined but could be described as regular purchases rather than occasional);
  • Goods purchased for daily or short-term consumption (e.g., newspapers, food, drugs) and services (e.g., taxis, barbers, dry cleaning), as opposed to longer-term consumables like apparel, home furnishings, electronics, etc.; and
  • “Sister-categories” to those benefiting elsewhere from changes to the rules for supermarkets and gas stations (e.g., bakeries, convenience stores).

While MasterCard provided the above-stated rationale for its choices, RCC believes that market penetration is an unstated criterion, with lower rates in the 24 categories aimed at increased sign-up of merchants and more frequent credit card use by consumers in these settings.

These 24 MCC categories exclude a sizeable list of merchants, including apparel and shoes, home improvement and furnishing, entertainment and sporting goods, appliance and electronics, among others.

Because an MCC code is assigned to a merchant by its acquirer and not by the network, MasterCard will not get involved in arguments over whether individual merchants have been appropriately categorized. Such discussions with acquirers are to be expected now that MCC categorization has become meaningful.

New preferred rate categories have also been introduced for Consumer Recurring Payments (Core 1.36%, High Spend 1.48% and Premium High Spend 1.96%) and for Consumer Charity (Core 1.00%, High Spend 1.25% and Premium High Spend 1.50%)

Other Issues

An independent auditor will ensure that each network complies with the new 1.5% benchmark rate. The government has made it clear that non-compliance by the networks will likely lead to regulation.

The government will take the steps necessary to ensure that acquirers pass on these fee reductions, whether by mandating that network rules must require processors to pass on the fee reductions and/or allowing merchants to cancel acquirer contracts without penalty where said acquirer does not pass on the full fee reduction.

TABLE 1: NEW INDEPENDENT BUSINESS CATEGORY
MCC Description
4121 Taxicabs/Limousines
5192 Books, Periodicals, and Newspapers
5200 Home Supply Warehouse Stores
5251 Hardware Stores
5261 Nurseries, Lawn and Garden Supply Stores
5331 Variety Stores
5422 Freezer and Locker Meat Provisioners
5462 Bakeries
5499 Miscellaneous Food Stores - Convenience Stores and Specialty Markets
5697 Tailors, Alterations
5812 Eating Places, Restaurants
5814 Fast Food Restaurants
5912 Drug Stores and Pharmacies
5942 Book Stores
5994 News Dealers and Newsstands
5995 Pet Shops, Pet Food, and Supplies
7210 Laundry, Cleaning Services
7211 Laundries
7216 Dry Cleaners
7230 Barber and Beauty Shops
7251 Shoe Repair/Hat Cleaning
7523 Parking Lots, Garages

For further detail, please contact Karl Littler at Retail Council of Canada:
Office: 416-467-3783 | Mobile:416-906-0040 | Email: klittler@retailcouncil.org