Local retailers and restaurants want Congress to address the rising costs associated with accepting credit- and debit-cards — commonly known as interchange or “swipe” fees — that eat into the hard-earned profits of small businesses.
The interchange fee, which range from 1 percent to 3 percent of the transaction, is designed to cover the cost of electronic processing of the payments. But fees have become a major source of profits — to the tune of $48 billion annually — for the banks that issue credit cards.
And that’s the pot of gold that has merchants demanding action.
The swipe fees that businesses pay to accept credit and debit cards are confusing and difficult to track, according to Tim Phelan, president of the Connecticut Retail Merchants Association.
“The rates Visa and MasterCard charge depend on a merchant’s average ticket sales and volume,” said Phelan. “Competition is healthy, but we would like to see more disclosures about their process and have a better understanding of how they determine their fee structure.”
Visa and MasterCard charge as many as 250 different interchange rates, depending on the type of card and how it’s used. For example, a transaction in which a card is swiped through a reader is assessed a different fee than one in which a card number is keyed in by hand.
In 1991, Visa and MasterCard each had four standard rate categories; in 2009, Visa had 60 and MasterCard had 243, although not all rates would apply to all merchants.
At the same time, maximum swipe fees jumped more than a full percentage point. Visa’s maximum rates increased from 1.91 percent in 1991 to 2.95 percent in 2009 while MasterCard jumped from 2.08 percent in 1991 to 3.95 percent in 2009.
“The credit card interchange fees represent a significant expense to our company and it’s challenging to get a handle on how the charges are calculated,” said Martin Samuels, chief financial officer for Cow Parade, an online gift retailer based in West Hartford.
The credit card companies, which set the interchange rate on behalf of thousands of banks and processors, do not have to disclose their rate structure. Merchants do not have direct agreements with the card brands or the issuing banks, but can shop for deals among processors to handle transactions for them. At the center of the debate are the fee banks charge one another to handle electronic payments, the mark-up processors tack on to generate revenue and whether credit card issuers should limit the amount merchants are required to pay.
For example, when a cardholder makes a $100 purchase by credit card, the merchant pays $2.20 in discount fees for the transaction. Of that $2.20, the institution that issued the card receives $1.70 in interchange fees and the merchant’s banker receives 50 cents for processing the transaction.
Samuels wouldn’t disclose how much Cow Parade shells out each month in discount, interchange and merchant fees, but said the expense ranks fourth highest for his business, behind inventory, rent and labor.
The CFO said he recently audited his company’s statements and spent time analyzing other credit card processing alternatives. In January, Samuels switched the business to Heartland Payment Systems and claims his business pays 20 percent less today to accept the same amount of credit cards it did in 2009.
“It’s really important to know what you’re paying and to see where the money goes,” he said. “It is a complex system and regulating it would help but you have to start by educating yourself.”
David Gilbert, chief operating officer for the National Restaurant Association in Chicago, agrees. He says getting educated on the fee structure is important and suggests merchants shop around for the best rate.
More than 950,000 restaurants in the U.S. will serve 70 billion meals worth $580 billion this year, said Gilbert. His group recently collaborated with Heartland Payment Systems to develop a website called www.KnowYourCardRates.com that arms merchants with information about how much they really paid in interchange and other processing fees.
“Payment cards are the standard in this industry,” said Gilbert. “You just can’t be in business without accepting them, especially when you stop to think about how 75 percent of all the payments that are made actually come from a credit card.”
Visa and MasterCard account for about 71 percent of all U.S. credit card transactions, according to a recent Government Accountability Office report that found rising interchange fees have significantly increased the costs for merchants.
Options for reducing interchange fees pose serious challenges, according to the study, which reported American Express and Discover make up 24 percent and 5 percent of all credit card transactions, respectively.
Both Congress and the U.S. Department of Justice are investigating credit card fees as local and national lawmakers face growing pressure from merchants pinched by the fees in an already tough economic climate.
The U.S. government passed the consumer-friendly Credit Card Accountability, Responsibility and Disclosure Act earlier this year. The sweeping bill, also known as the Credit CARD Act, makes it illegal for credit card companies to hike interest rates without first notifying consumers. It also requires penalty fees to be proportionate to a cardholder’s violation.
Merchants want the same level of transparency about their credit card accounts that consumers receive, said Phelan.
“The credit card companies offer contracts that tie your hands,” said Phelan. “Our operators have no leverage when it comes to negotiating rates and terms like a large retailer does.”
Phelan says his group wants lawmakers to require financial services companies to disclose interchange rates, terms and conditions more clearly.
He would also like to see credit card companies prohibited from charging businesses higher fees when they accept premium cards that give consumers reward points over regular cards.
Credit card companies should not have a say in whether businesses display cash or debit card discounts or payment preferences, say merchants.
“I don’t have any choice but to take credit cards and I really don’t mind that there is a fee tied to it since I realize it’s the cost of doing business,” said Christian Burns, owner of Greenwich Tavern, which operates The Ginger Man Restaurant. “I just wish there was more room to negotiate the terms.”
Burns has noticed other trends in the industry as well. The restaurant owner says his workers are dialing credit card companies more often for charge approvals because of consumers place fraud prevention alerts on their accounts.
“I understand why it’s that way, but at the end of the month, everything adds up and cost us money.”
Credit card companies say the price controls small businesses want across the industry will only hurt consumers. Electronic Payments Coalition, which represents the credit card issuers, denies that smaller retailers are unable to negotiate fees and claims that credit cards help all businesses increase traffic and sell more.
On its website, the Electronic Payments Coalition calls the interchange fees a “cost of doing business that helps to partially reimburse card issuers for the activities they perform and the risk they take on for each transaction.”
Electronic Payments Coalition did not return calls or e-mails seeking comment.
“When we enter a credit card number instead of swiping it because the customer’s card is demagnetized, call in a charge authorization or pay our merchant swipe fees at the end of the month instead of daily. It doesn’t matter what it is, we eat the costs for our guests.”
“It’s frustrating when you have a full restaurant during dinner rush and you have to stop and make a few calls to get authorization to charge a credit card,” said Burns.
