Mastercard merchant fee transparency & caps
 

The day before Mastercard announced the World Elite product discussed in another thread, they also made other announcements that may have greater long term impact on credit card reward programs. These are reported in the Wall Street Journal on 6 September 2006

http://online.wsj.com/article_print/...045754863.html

Highlights:

1. MasterCard Inc. said it will soon begin posting fees it charges retailers..."Among the things merchants have told us they want is additional transparency around interchange rates," said Walter Macnee...Americas president of MasterCard. I take this to mean that Mastercard will publish a fee schedule to allow merchants to verify that they are paying the same as their direct competitors, but I believe this will also allow them to see that other types of merchants pay less and this will create pressure to lower fees generally.

2. MasterCard Inc. said it ... will cap fees it charges on fuel purchases. I am not sure if this means they will not charge more than a fixed dollar amount per transaction, or if it means they will charge the same for Standard, Gold, Platinum, World and Elite fuel transactions. Either way, once the precedent is set for fuel I expect it will spread to other categories.

3. The average interchange fee on all U.S. purchases is about 1.56%, according to a May 2005 Federal Reserve study. I think tells us that any rewards program that pays more than about 1% cannot be sustained longterm. Note that the HSBC/Saks program offers only 1%, except on purchases from Saks, even though the World Elite cards are intended to extract higher merchant fees.

dennis

Thanks for the info Dennis. I will say that this isn't strictly true as credit card companies do make money from areas besides interchange fees (late fees, overlimit fees, near-usurious interest) and having an annual limit on rewards limits their exposure that way. Another is the "synergistic" effects a financial institution can receive. E.g., the MBNA Fidelity 529 card is a straight 2% back card which can be afforded (presumably paid by Fidelity and not MBNA) because basically the money is paid back into a Fidelity 529 account which has various annual fees.

An interesting thing going forward now that MC is public and not completely controlled by the banks is that it's actually in MC's interest to lower interchange fees. MC primarily makes money from clearing transactions so volume is important.

<<as credit card companies do make money from areas besides interchange fees (late fees, overlimit fees, near-usurious interest) and having an annual limit on rewards limits their exposure >>

Granted, but to the extent that rewards are tied exclusively to charge volume the issuer cannot be assured of generating any fee or interest income, especially on charge cards, although American Express does keep asking if I would like to finance anything at prime plus 9.9% :rolleyes: . I do realize there have been rewards tied to carrying a balance, but I don't think these are the programs discussed on Flyertalk.

dennis

Hmm... here is my speculation. The credit card folks probably manage each cards profitability. They probably build a statistical model using each of the following variables.

monthly spend
balance carried forward
interst rate
late fees
other transaction fees
MC transaction fee

They probably choose a % reward that meets their expected profit level with pretty high certainty. They may sweeten it if they are trying to gain market share vs. profitability.

Because the variables are more than just MC transaction fee, they can pay more. Many consumers incur interest, late fees, etc.