The credit card companies are not sitting on their hands, but are setting out to halt the erosion in their revenue caused by the fall in interchange fees. "Globes" has found that, in the past three months, the credit card companies have raised, or changed the terms of, the fees they charge to merchants, in order to compensate for the decline in interchange fees.
When Antitrust Authority director David Gilo led the move to cut interchange fees, he expected that this would lead to a fall in the fees collected from merchants. Recent moves however indicate that it might actually have the opposite result.
Leumi Card Ltd. and Israel Credit Cards-Cal Ltd. (ICC-Cal) (Visa) have announced a rise in the clearing fee charged to merchants, which is the main fee in this market. Cal has announced an average rise of 0.2-0.5% in the fee it charges, while Leumi Card will raise its clearing fee from January 2013 by a slightly lower percentage, 0.1-0.45%.
Leumi Card has not made do with raising the clearing fee, and raised two other fees as well. First of all, the company raised the discount fee to merchants by 0.4-1.5%. This is the fee that the merchant pays the credit card company for receiving the payment before the customer's payment date.
Sources close to the company say that the rise in the discount fee was not imposed on all merchants, but on certain sectors, in accordance with the rise in the level of risk in the market. In addition, the company raised the tourist card fee by 0.6-1.0%. This is the fee charged on use of foreign credit cards. Company sources pointed out that by this rise Leumi Card came into line with the level of fees charged by its competitors.
Isracard Ltd. is not raising fees, and sources at the company say that there are no plans to do so anytime soon. But the company has executed one step to improve its revenue, when it announced in October that businesses will pay a clearing fee even for cancelled transactions. The fee reportedly averages 0.5% of the transactions, which will boost revenue by NIS 5-10 million a year.
Isracard has also decided to focus on cost-cutting to deal with the reduction in interchange fees and the amendment to the Credit Card Clearing Law (the so-called Isracard law). The company cut its expenses by 6% in January-September 2012 to NIS 278 million.
Isracard, Leumi Card, and Cal declined to comment on the report.
Every fraction counts
Why are the credit card companies raising fees? A customer who called a credit card company to ask why his clearing fee was raised, was told, "It because of the worsening economic situation." But this is not the real reason in most cases.
In December 2011, Gilo announced the final structure for the reduction in interchange fee that the credit card companies pay each other, to reduce it from 0.975% to 0.7% in July 2014. Gilo's objective was to benefit businesses. It was expected that reducing the interchange fee, which is the main part of a transaction fee, would lower the interchange fees that businesses pay the credit card companies.
Although the reduction in the interchange fee seems negligible, every thousandth of a percent counts, given the almost NIS 200 billion in annual credit card transactions. The reduction in the interchange fee should reduce the credit card companies' annual aggregate revenue by NIS 500 million.
The credit card companies were furious at the intention. "The recommendations are an earthquake which we did not expect," said Cal's CEO in May 2011. "If these recommendations are passed as is, the market will not be what it has been until now," warned Isracard's CEO.
The first stage of the interchange fee cut affected the three credit card companies' revenue. Their revenue from businesses was NIS 1.6 billion in January-September of 2012, 3% less than in the corresponding period of 2011, even as credit card use was 7% higher. Isracard, the biggest clearing company, took the biggest hit, with a 5% drop in its revenue from businesses in January-September compared with the corresponding period.
It had been expected that the decline would continue and even increase, as the interchange fee was cut further, and that the credit card companies would compete between themselves by cutting clearing fees to increase their market share. But the companies' appetite for market is apparently no longer what it once was, and definitely if came at the expense of profits.
The credit card companies saw what competition did in the mobile sector, but since they do not have the mobile carriers' fear of new competition, they had an easy way to compensate themselves - they raised their fees.
What is the interchange fee
The interchange fee is the commission that credit card companies pay each other for the right to clear each other's credit cards at businesses. For example, the customer of a credit card who makes a purchase at a business that does not have a clearing agreement with the company, the competitor will clear the credit card for payment from the credit card company that issued the card. The company that cleared the credit card will pay a fee to the company that issued the card - this is the interchange fee. The interchange fee is similar in this respect to the mobile carriers' inter-network connectivity fees, and is the floor price of the clearing that the credit card companies charge businesses.
What is the clearing fee
The clearing fee is the commission that businesses pay credit card companies for clearing customers' transactions. The fee is 1-2%, depending on the size of the business and it bargaining power vis-à-vis the credit card company. Most of fee is the interchange fee.
Published by Globes [online], Israel business news - www.globes-online.com - on December 27, 2012
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