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Archive for September, 2008
We recently created a 1-page document entitled Five Steps to Saving Money on Credit Card Processing. Credit card processing, like most financial services products, is complicated and if you want to be an educated consumer there is lots to learn.
This document is meant to quickly highlight the basics for business owners who don’t have much time and just want a quick “cheat sheet”. We hope you find it useful.
Recent coverage in a few Canadian publications entitled Businesses say credit card companies sneaking in fee hikes explains how the rise of rewards cards and their higher interchange rates is hurting merchants.
“What happens with these fancy cards, the merchant fee for it is already a percentage of the transaction, but this percentage has increased,” said Andreea Bourgeois of Moncton, the director of provincial affairs for New Brunswick for the Canadian Federation of Independent Business.
“One increase occurred in June … Starting next week, the merchant is going to pay higher fees.”
Not only will the basic interchange fee rise – somewhere between 0.46 cents to 0.71 cents per $1 spent, using a reward charge card will bring an additional processing fee of 0.3 per cent to the merchant.
Businesses in the US actually have it quite a bit worse, where a normal transaction costs between 1.50 and 2.20 cents per $1 and rewards cards can add another .30 to 1.00 cents. Unfortunately for US merchants, the credit card processors often take rewards cards as an opportunity to increase their margins by passing along *more* than the amount that Visa and Mastercard have increased rates. The best way to avoid that trickery is to use Interchange Plus pricing.
An article was published last week in the Christian Science Monitor titled Retailers, banks battle over credit-card fees, about the costs of accepting credit cards. If you accept credit cards it might be worth a quick look. Some highlights:
“There’s no question – if 50 percent of [a merchant's] transactions are on plastic and interchange fees average 2 percent, the average cost to everybody is 1 percent higher than it should be,” Mierzwinski says.
The NRF charges that only about 13 percent of an interchange fee goes toward processing a transaction, “with most of the rest going to the cost of card issuers’ rewards programs and profits,” according to an NRF new
Our take -
- This dispute will continue until the government intervenes one way or another. Given the lobbying strength of the banks and credit card issuers it is unlikely that the result will be as extreme as in Australia, where interchange fees were capped.
- The credit card industry always likes to talk about how the average discount rate has fallen over the past XX number of years. Strictly speaking they are correct, but it’s a convenient representation of the facts. In reality, the average credit card discount rate has risen, while the overall rate has been reduced by increased use of debit cards, which have a lower discount rate (but higher than cash, obviously). Additionally, the markup that goes to the credit card processors has fallen, while interchange rates (the part that goes to the Visa / MasterCard issuing banks) have gone up.
- Advocates for lower interchange rates often argue that the interchange fees don’t benefit consumers. That isn’t really true, since much of interchange pays for rewards programs which benefit consumers. What really happens is that interchange fees redistribute money from a combination of merchants, consumers without credit cards and consumers with non-rewards credit cards to the issuing banks and to people who have rewards cards.
