Retailers: Credit Card Action Should Include Interchange Fees

By George Anderson

The Obama Administration
has signaled its support for two bills circulating in the House and the
Senate that would place curbs on fees and other practices by credit card
companies that are seen as harmful to consumers.

At the same time, retailers
and the groups that represent them in Washington are calling on legislators
to take a look at the true cost of interchange fees on businesses and consumers
following Visa’s decision to raise the fees it charges on card transactions.

The
Food Marketing Institute’s president and chief executive officer Leslie
Sarasin, said in a statement, "At a time when consumers
and retailers are fighting for their economic survival and just a few days
after they paid their taxes, Visa’s interchange fee increases are deplorable.
Interchange is, in effect, a hidden tax on every plastic transaction, fixed
by the credit card companies and banks in an anti-competitive market."

According
to the Association for Convenience and Petroleum Retailing (NACS), credit
card fees are the second largest operating expense. Interchange fees paid
by the industry in 2007 more than doubled the pre-tax profits generated by
convenience store operators that same year.

Discussion Questions:
Should Congress pass legislation to limit or otherwise change the current
interchange fee system? What would be the fallout if interchange fees
were restricted?

BrainTrust

Discussion Questions

Poll

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Steve Montgomery
Steve Montgomery
14 years ago

The convenience store/petroleum marketing industry has long decried the impact of interchange fees on profitability. Industry statistics (and our clients P&L’s) have shown that in many cases the credit card companies made more money than did the retailers (based on gross margin) on the sale of gasoline. In some cases they were so large as to mean the gas was being sold at a loss. Frankly, I am not for more government, but in this instance it appears that that is what it will take to rein in these fees.

Ralph Jacobson
Ralph Jacobson
14 years ago

These are nothing more nor different than the fees imposed by other service providers of all types. This is capitalism at its purest. Visa is offering a service and we all have a right not to use their service. The retailers also have this right. If the industry is “charged up” about it, push back and stop whining.

Ryan Mathews
Ryan Mathews
14 years ago

Yes they should. The fallout? The rich wouldn’t get richer–or at least not so quickly.

Nikki Baird
Nikki Baird
14 years ago

Whether the government can come up with a way to resolve this issue definitely remains to be seen, but I think one thing that should happen is transparency. Retailers’ hands are completely tied: consumer adoption makes it necessary to accept these types of transactions, but they are not permitted to expose the true cost of the transaction to the consumer. If retailers could show to consumers the true cost, how long do you think it will be before consumers–and credit card companies–change their behavior? Would you pay cash or write a check if it knocked 2% off your purchase price? Would you rather earn points or pay less?

Consumers should get to decide, and in doing so, would serve to drive interchange fees closer to a proper “market” level.

Kevin Graff
Kevin Graff
14 years ago

Credit card companies are completely out of control! The arbitrary increases in fees is taking a shocking toll on retailers. Worse still are the ridiculous interchange fees being charged. The new “Infinite” cards put out by Visa and Mastercard now fall into that deplorable “non qualified transaction” category. What does that mean? One simple thing: about a 50% higher interchange fee! Retailers don’t even recognize that they’re being robbed when accepting these seemingly standard cards. While I’m not a big fan of government intervention, in this case, it seems it’s the only option.

Al McClain
Al McClain
14 years ago

The fight over interchange fees has been going on for years. When will the first major retailer offer a discount for cash and/or debit card use? I don’t think charging extra for credit card use would fly with consumers, but a small cash discount might, especially in a tough economy.

John Lofstock
John Lofstock
14 years ago

The fees convenience store and petroleum marketers pay to credit card companies are astronomical–in the billions. It drives up the cost of fuel, foodservice and most everything else in the convenience store. Nikki Baird absolutely hit the nail on the head. Retailers’ hands are completely tied, especially as pay-at-the-pump has become a more popular convenience for customers and fuel prices have trended upward (and they’re heading up again). Interchange fees are often hidden from retailers leaving them very little room to negotiate and giving them the unenviable option of either eating the cost or passing it onto the consumer.

I don’t believe this is capitalism at its best, unless you stick to the adage that it’s legal if you can get away with it. Retailers like Wal-Mart and Sears won a landmark case against the card companies for some of their shady practices on debit processing. They paid billions to settle the case–an apparent acknowledgment they were wrong.

In other words, the card companies have exploited retailers at every turn and will continue to do so without some kind of regulation, or at least a mutual agreement. I had a conversation with someone at NACS a few weeks ago who pointed out that the convenience store industry is already regulated to death (tobacco, alcohol, fuel blends, etc.) so having the government pile on additional oversight isn’t necessarily the first choice, but there seems to be very little common ground right now from which the industry and the card companies could begin negotiating a mutually beneficial fee structure. And I know for certain that’s not because of a lack of effort from retailers.

Kai Clarke
Kai Clarke
14 years ago

These fees are usurious. The alternatives are limited for both consumers and retailers, and the industry is clearly acting to restrain trade, thus violating our anti-monopoly laws. That there are only 4 credit card companies, and the barriers into the market are very high, all point to a monopoly (or at the very least oligopoly) based industry which demands government intervention to protect the consumer and the retailer. Why have we waited this long?

Li McClelland
Li McClelland
14 years ago

Didn’t gas stations want us all to learn how to pump our own fuel and pay at the pump? Wasn’t that so they would be able to hire fewer of those human employees who used to fill our tanks and give us change back from our twenty dollar bills? Weren’t they doing all that to improve their margins? Of course I’m being somewhat facetious here, but there ARE costs of doing business. Facilitating use of credit and debit cards are part of this era’s costs of doing business.

Increased consumer protections and regulations on US banks who “own” the money behind the debit cards and credit lines used by consumers is one thing. Regulating Visa and Mastercard as publicly traded companies who do worldwide branding and transaction processing behind the scenes is quite another.

Camille P. Schuster, Ph.D.
Camille P. Schuster, Ph.D.
14 years ago

In an economic situation in which the effort is to create more consumer spending, increasing the fee on using credit cards does not make sense.

Liz Crawford
Liz Crawford
14 years ago

The fee on credit card use is sure to slow down some purchases, if for no other reason than consumer cash flow problems. Do we really need more of a slowdown at this point? Probably not. On the other hand, deterring consumers from using credit (if fees are passed on), encourages awareness and responsibility. We know shoppers spend less when using cash.

Anne Bieler
Anne Bieler
14 years ago

This issue definitely needs serious attention if we all are going to come through this. Fees definitely are factor in retailer bottom line.

As an example, a major travel company cited increased fees and restrictions as a significant reason that the company went from “over-extended” to an abrupt halt of operations. Regulators were not expecting this total collapse and the situation received a lot of media attention.

The point is that more and more discussion about retailer survival includes this issue.

The argument of course is made that credit card companies have increasing exposure because of the economy. And a very strong case has been made by previous contributors about the need for transparency here.

Additionally, it seems incredible that at a time like this, there are still unsolicited credit card applications arriving in the mail–offering easy terms for new clients. When questioned, the lenders said they are only sent to “targeted addresses”–and they know in broad mailings that everyone in a certain neighborhood is doing well? Or how about identity theft increasing as false applications are made?

It seems critical that lenders tighten up their screening process for new clients, provide a clearer understanding of their fees and practice, and work with all to manage debt responsibly.

Marge Laney
Marge Laney
14 years ago

Bank default rates on credit cards are skyrocketing. Part of their answer is to raise rates and fees on performing customers to make up for the lost revenue. Fair? No. If they don’t watch it they’re going to kill the golden goose that is the consumer. Something needs to be done, but I’m not so sure it’s the government that should do it. Haven’t we had enough government intervention in the private sector? They always mean well, but the unintended consequences of their actions usually make matters worse. There is plenty of law already on the books that just needs to be enforced. The business community needs to learn to regulate itself.

Ken Yee
Ken Yee
14 years ago

Are fees to high for retailers? I don’t know. I’m not sure the rate of fixed fee amounts are. Is cutting them in half good enough? Axe them all?

But what is the alternative? Are retailers willing to take in sales based on cheques and hope customers are carrying $1,000 in cash to buy a TV? There are always debit cards.

Most retailers don’t accept $50 bills (especially $100) or higher and cheques (at least here in Canada) are virtually non-existent options for payment. I don’t know any retailer that accepts them…maybe pawn shops.

That leaves retailers forcing customers to use credit cards, debit cards, or to carry cash.

And what about stores wanting their customers to sign up for store brand VISA or Mastercards? Good? Bad?

Chris Mailing
Chris Mailing
14 years ago

Marge Laney of Alert Technologies has good insights in my opinion. As a recent convert to retailing after 20 years in the credit card industry, I can tell you that the credit card associations (Visa, MC, etc.) are dominated by the banks that issue credit cards. The banks that process merchant transactions (First Data does over 50%) are not even represented.

As the card issuing banks compete with each other for market share and offer credit cards to more people (poorer credit risks), they trade away their margins by offering bigger incentives and incurring higher loan losses. When the pain becomes too great to bear, they look for a common solution, which maintains their competitive parity, which is raising interchange rates. Further, the industry knows they are a sitting duck for regulation, so they’re getting their fee increases in now, ahead of the new rules.

In my opinion, retailers need to have the ability to say, “we’ll accept any credit card with an interchange fee of X% or less.” That Visa and MasterCard force us to accept all varieties of credit cards with widely disparate interchange pricing on an all-or-nothing basis is a violation of the Sherman Anti-Trust Act. This is exactly the argument that resulted in Sears, Wal-Mart, et al’s multi billion dollar settlement with Visa and MasterCard over debit card acceptance fees.

Ed Dennis
Ed Dennis
14 years ago

Retailers are not consumers. I would think if the FTC would enforce the laws on the books now (Sherman Act and Robinson-Patman) that retailers wouldn’t need any protection. Unless pricing for processing is different in a manner that grants one competing retailers an advantage over another then the retailers has no room to gripe. Are processing fees high, yes they are but retailers have the option of not dealing with certain card companies. I don’t believe Sam’s Clubs accept anything but Discover and they seem to get by.

If retailers have a problems then this is when they should get their Associations involved and negotiate better deals OR start their own processing service. NACS, NRA, etc. could become relevant again by doing something proactive in this area.