Retailers Winning Interchange Fee Fight

By George Anderson

If there is anyone working in retail today who doesn’t want
to strictly limit what banks and card companies can charge for interchange
fees, then they must be the only ones we haven’t heard from on the issue. Over
and over again we’ve heard that the fees represent a hardship for merchants
and, ultimately, consumers because they cause the cost of goods to go
up.

Senator Dick Durbin offered an amendment to the financial reform legislation
in Congress that is widely supported by the retail industry. Upon passage of
the measure in the Senate last month, Sen. Durbin wrote, "Passage of this
measure gives small businesses and their customers a real chance in the fight
against the outrageously high ‘swipe fees’ charged by Visa and MasterCard.
It will prevent the giant credit card companies from using anti-competitive
practices, allow merchants to offer discounts to their customers and restore
common sense and fairness to this broken system."

The banking and card
folks counter that the fees are legitimate and that eliminating them would
mean that consumers would have to pay annual fees or incur some other type
of charge to make up the difference. In essence, the amount consumers pay will
not change, but where they take the hit will.

In a letter to Sen. Durbin, MasterCard
CEO Robert Selander wrote, "The
decrease in merchant acceptance fees which would result from your amendment
would simply be borne by consumers — and at a time when consumers are struggling
from the steep recession and trying to regain some degree of spending power."

Discussion Question: What will the net effect of interchange fees dropping
be for retailers and consumers?

[Editor’s Note] A report by the Treasury Department estimates that the federal
government can save $39 million a year by negotiating lower fees on card transactions.

BrainTrust

Discussion Questions

Poll

11 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Roger Saunders
Roger Saunders
13 years ago

Without question, the Interchange fees are a significant cost for retailers, large and small. And, they represent a significant revenue stream to the card companies. There are very real costs/risks that they are incurring, as well.

Retailers are unlikely to be able to make a statement to the consumer about reduced costs, as a result of this legislation that is working its way through Congress. And, we’ll all be surprised if the end consumer ends up with a savings at their local gas station, department, or specialty store store chain–those firms will take the savings through to bottom line and capital improvements.

Small, Main Street merchants are likely to use the small amount of savings to right their cash flow and merchandise issues. The “consumer” is being used as the poster child on this one–either way the legislation goes, they won’t be the winner.

Mel Kleiman
Mel Kleiman
13 years ago

The banks are going have learned from the federal government that if you cannot get money for what you need from one type of fee than change the name or the type of fee.

Secondly, the retailers are going to love the extra profit. Do you really think they are going to pass the savings on to the consumer? They are all looking for ways to strengthen their bottom line.

Ryan Mathews
Ryan Mathews
13 years ago

I’m with Mel here. I think this will create retained earnings, not lower cost.

Bill Robinson
Bill Robinson
13 years ago

One of the most amazing technology achievements in the last fifty years of retailing is the world wide acceptance of bank cards. Who could have forecast back in the ’60s that one day retailers would not offer their own credit, that consumers would typically have 5 or more cards, and that the banks would have extracted about 2 points from the retailers net sales? In an industry that spends less than 2 points on technology itself, this alone is amazing.

It is definitely time for retailers to get this balance right. They have spent billions to enable the full range of electronic payments. But their benefit is short-lived as the bar keeps getting higher. The only long-term beneficiaries are banks, POS companies, and the legion of 3rd party payment services. Worse, an ever growing number of consumers find themselves financially broken by their inability to manage their credit. In the end, retailers suffer. It is bad.

What should retailers do? Legislation is good. But free enterprise is better. Large retailers can afford to put in their own switch to the leading payment providers and completely bypass the interchange. Malls could do the same. Smaller retailers and independents could combine forces to do the same. Congress can help by removing the barriers and encouraging more competition.

Gene Detroyer
Gene Detroyer
13 years ago

There is only one way that this can become a consumer issue. This is if merchants provide discounts for cash purchases. If there is a cost in electronic payments that is truly burdensome, then the discount could be substantial. (Please, no one out there really believes that merchants will pass on savings from interchange fees in their prices.)

But, let us not forget the value of electronic transactions for retailers. First and foremost, they sell more. This is not related to competitive advantage versus other retailers. This is related to decisions that consumers make. Consumers are more likely to buy with a credit/debit card than they are with cash. How many interchange fees can be covered with one extra sale at 50% margin (we are talking about merchants with hardships, right)?

What is the alternative? Taking checks? That is a transaction that has huge costs! How long does the merchant wait for the check to clear? Or, if it doesn’t clear? One bounced check costs the merchant the bank fee for the check plus the loss of revenue, margin plus the cost of the item. In this case the interchange fee is like insurance.

What is the down side of cash? Errors? Slippage? Accounting? Interchange fees are sounding good at this point.

Plus, the funds from electronic transactions are available to the merchant almost instantly.

While the banking industry is in dire need of regulation, this is one where the environment is competitive and the need is significant. Other than permit cash discounts, let the market work on this one.

N.B. I doubt we would see many merchants offer cash discounts, which in itself would be an answer to how critical this issue really is.

Paula Rosenblum
Paula Rosenblum
13 years ago

I don’t think the banks and credit card companies can pass the “extra costs” (i.e. lost profits) along to consumers, and I don’t see retailers lowering prices either.

I see the retailers making a bit more money, and the banks making a bit less. However, I don’t see it as make-or-break for either industry.

George Anderson
George Anderson
13 years ago

The truth here is that neither the banks or retailers are being honest in this debate. For the sake of retailers, let’s hope there isn’t anyone around to remind consumers that the stores where they shop claimed interchange fees were driving prices up. If they remember that argument, they’re going to wonder why they never saw prices come down once Sen, Durbin’s amendment becomes law. A more honest response to this situation would have been for all retailers to follow the lead of gas stations and offer two sets of prices–one for cash and one for plastic.

Mark Burr
Mark Burr
13 years ago

The ability to reduce these fees lifts the strain off smaller retailers who have eliminated their acceptance from the consumer. Most small cafe-type restaurants in my region no longer accept cards.

Reduction or elimination of these fees is a boost for them. Card purchase are a higher average sale in almost any retailer than other forms of payment. Limiting or elimination of acceptance helps no one.

All said and done, it would be foolish to think it would by itself reduce costs to the consumer. The likely is the opposite, they would spend more as they are using a card. Retailers would see improved margins and reduction in cost and a boost to the bottom line.

Ed Rosenbaum
Ed Rosenbaum
13 years ago

Interesting poll results to this point. There is not one favorable vote that the consumer might see a reduction in costs if the bank swipe fees were reduced.

On one hand the banks are making incredibly exorbitant profits on something probably never touched or seen by a human being unless there is a computer program problem. It reminds me of the bail-out money the banks received to lend consumers. It is not being lent because it is invested in a more profitable manner; again not touched or seen by a human.

So why not lower the fees, make a less exorbitant profit and everyone but the consumer is a little happier? Now how can this be filtered down to the consumer? There has to be an oversight group out there looking at this to let the retailers know we are the ones actually paying their bills.

Bill Hanifin
Bill Hanifin
13 years ago

Retailers and others have tried for years to create an alternate payment system to give them options from the associations. The fact that none has been able to make a difference tells me that there is inherent value to what the associations offer merchants. There is a price to be paid for that value.

I am skeptical that retailers will pass along savings to their customers from reduced interchange fees.

I also wonder if retailers are prepared to create and fund their own promotional rewards programs (Loyalty programs).

Promotional currency (points) has to be paid by someone. That someone has been the banks as funded by interchange passed through the value chain. Merchants share in the cost as they pay the MDR and consumers share part of the burden in theory as well.

If the revenue is pushed out of the value chain, retailers will be on their own to attract customers through merchandising techniques including discounts and sales.

If I owned a store, I’d rather give up 2-3% to maintain a loyal set of customers and be able to measure the return than be faced with periodically posting 30% off signs in the window.

There should be compromise in the system and the associations have accommodated higher frequency/lower average transaction business as well as specific verticals such as grocery.

I would much prefer to see further progress made through an extension of these means rather than through legislated change.

John Crossman
John Crossman
13 years ago

I am always for smaller retailers being able to make more money. Hopefully, it will provide a little encouragement that will result in expansion and more new hires.