The New Battle Ground: Credit Card Interchange Fees

Small Businesses Accepting Credit CardsA few weeks ago I drove home for my parent’s 25th wedding anniversary. To celebrate their silver milestone, I decided to pick up a nice bottle of wine from a small, family owned liquor store, just off the main boulevard in Rome, NY.

After letting the clerk know the occasion, she suggested a slightly aged bottle of Bordeaux, which I happily accepted. At the counter, things got interesting. When I took out my plastic, the clerk let me know they no longer accept credit cards. A bit bewildered, I asked why. She explained that while they know it’s an inconvenience to require payment in cash, their narrow margins couldn’t support the fees imposed by the credit card companies. Fortunately, I had enough cash on-hand to pay, but this incident peaked my curiosity enough to investigate further.

The Skinny on Interchange Fee’s

An interchange fee is the percentage of the purchase that credit card companies charge merchants to accept their cards.

Virtually every merchant passes these hidden costs along to the customer. In the last year alone, these fees cost the average American household $427, regardless of whether they paid in credit, debit or cash.

What’s more, these charges have been steadily rising, accounting on average for 2% the value of every sale. While that might not seem like much, it adds up, having netted the credit card industry $48 billion in 2008.

Recently, the government passed the Credit Card Accountability, Responsibility and Disclosure Act, which is supposed to reign in excessive fees and arbitrary rate increases for cardholders. While it’s an improvement, it shied away from directly addressing interchange fees. Instead, the bill designated a commission to determine the impact these fees have on businesses and consumers.

Major Issues Retailers Have With Interchange Fees

    • A lack of transparency in how fees are calculated. For instance, these fees range from 1- 2%, with the rate varying due to many complicated factors. Factors that influence the fee: 1) If the person uses credit or debit; 2) If credit, whether the card offers rewards or not; 3) The merchant’s volume of transactions; 4) The type of merchant, whether gas, grocery, restaurant, or ecommerce.

    • Retailers are unable to provide incentives to customers who pay with cash or debit. Although a law allows merchants to provide cash back incentives to customers who pay with cash, the credit card companies make it difficult for merchants to do so.

    • Lastly, merchants cannot collectively bargain to have the fee lowered. To date, the only retailer with enough clout to lower their rate has been Wal-Mart.

The Positive Effects of Interchange Fees

    • These charges are used to fund credit card rewards programs.

    • The benefit to retailers who accept credit cards may outweigh the cost of interchange fees. For instance, customers are likely to spend more when using a credit card than paying with cash.

What Are Your Thoughts?

Do you think interchange fees hurt your business? Would you lower your prices if credit card companies reduced their interchange fees? What do you think needs to be changed with interchange fees?

Photo credit szlea