BusinessWeek explores the current battle raging on capital hill between lobbying efforts of retailers and merchants versus those of the banks charging the baseline ‘interchange rates’ required of all credit card transactions.
Interchange rates are the non-negotiable baseline fees charged by banks that vary depending on a wide assortment of factors – from the type of credit card used in the transaction (rewards and corporate cards incur higher fees) to the type of transaction (whether the card is present or not, for example). By way of example, the current interchange rate for a CPS retail category Visa card is 1.54% + $.10 per item charge – before any of the other processing fees are taken into account. For merchants processing small ticket items, this charge can be quite onerous:
Kathy Miller, owner of a grocery store in the 961-person town of Elmore, Vt., told the committee she may as well give small-ticket items away free because selling them costs her money after the interchange fees are accounted for. Currently, merchants are barred from demanding a minimum price for credit-card purchases. “We can’t keep absorbing these fees,” Miller said. “Some days I feel like I should just turn my keys in.”
The article then goes on to discuss whether or not consumers would benefit from a reduction in interchange rates – an argument I feel is mostly moot. There’s no question that lower rates would benefit small business owners such as Kathy Miller detailed above – but as BusinessWeek points out as costs drop in a competitive environment, those savings are invariable passed on to consumers:
Some outsiders experts believe, though, that given the nature of retailing, stores would be forced to lower prices. “If merchants are in a competitive industry, when their own costs drop, those costs get passed along to consumers,” says Adam J. Levitin, associate professor of law at Georgetown University. “No one would question that for any other cost of doing business—that if a cost drops, some of it would be passed on.”
Another big issue the article explores is the effect newer rewards cards are having on the fee structure for merchants. Every time a customer of yours uses a rewards card – a credit card that gives a small percentage of a purchase back to the card holder – merchants pay a higher fee.
The larger issue for retailers, especially small-business owners, is that they want more control over what types of cards they accept and when they have to accept them. Now, if merchants opt to accept Visa or MasterCard, they must accept all Visa- or MasterCard-branded cards even though different cards under one brand carry different rates. And they must accept card payment no matter how low the purchase price.
If allowed, smaller merchants probably would be more hesitant to accept rewards cards, which in Visa’s case carry interchange fees as high as 2.4% per transaction, compared with Visa’s roughly 1.6% average interchange rate. While this would keep merchants from having to subsidize the rewards of their customers, it might eliminate free rewards cards altogether, since banks would likely be unwilling to pay the rewards out of pocket.
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