MasterCard Cuts Processing Fee Increase to Placate Merchants

MasterCard International on Friday scaled back a previously announced increase in the processing fees that merchants pay for credit card transactions, a move to placate retailers who had threatened to stop accepting its card.

MasterCard also formally announced that it is creating a new, low processing fee for merchants who process transactions entirely electronically.

The move, which was expected, will have virtually no effect on the rates and fees consumers pay for merchandise bought with the credit card. The processing fees--called interchange fees--are paid by merchants and go to the banks that issue the cards. Higher interchange fees could have been passed along to consumers in higher prices for goods.

Fees Roughly in Line With Visa

But the move “will encourage merchants and retailers to move at an even faster pace toward electronic systems for processing card transactions,” said John Love, publisher of Credit Card News, a Chicago-based trade publication. About a third of all card transactions are processed totally electronically through a process called “draft capture,” Love said. That is up from virtually none when the process was introduced in 1984, he said.

The move also puts MasterCard’s fees roughly in line with those of archrival Visa, said Kurt Peters, editor of Credit Card News.

MasterCard had proposed a 29% fee increase in August, a move that company officials said was prompted by increased losses on credit card accounts and other costs. Industry observers said the move instead was designed to encourage more banks to issue MasterCards, to allow the firm to gain market share from Visa.

New York-based MasterCard led San Francisco-based Visa in cards issued until the late 1970s, but Visa then took over and since has widened its lead. Both are owned by groups of banks that issue the cards.

Three-Tier Rate Structure

The proposed rate increase was greeted with displeasure by such merchants as Wal-Mart Stores and Toys R Us. Some retailers threatened to stop accepting MasterCard, and industry observers said others might have added competing cards.

“This takes the heat off MasterCard as far as merchants are concerned,” Love said.

Under its new rate structure announced Friday, MasterCard will create a three-tier structure for its processing fees, replacing its current two-tier system. A new, low rate of 1.1% per transaction, to begin in April, will cover purchases authorized and processed electronically. That rate will be substantially equal to the current rate for transactions authorized--but not necessarily processed--electronically.

An increase in that latter rate, to 1.4% plus 4 cents, will be postponed until April 14, 1989, MasterCard said Friday. It had originally been scheduled to go into effect Jan. 1.

“We believe that fully cost-based interchange rates are in the best interest of the bank card industry and the merchants that accept the card, but we must also be competitive,” Alex W. (Pete) Hart, MasterCard’s new president and chief executive, said in a statement Friday.