Innovations in payment technologies save retailers money, but itâ€™s tough to recoup 2% to 3% of sales when paying credit card interchange fees.
Technology saves the retail industry billions of dollars by cutting waste and improving efficiency. One of the areas most improved by technology is the retail checkout, where customers pay for goods and services. However, the savings are increasingly negated by a major component of payment costs that retailers cannot control — the interchange fees that credit card companies and banks extract from every plastic transaction.
Together, Visa, MasterCard, and the banks that issue their cards fix the fees in secret with no regard for the phenomenal advances in technological efficiency and economies of scale in today's computer-driven electronic payment systems. In fact, only a small fraction of the fees — 13% according to one estimate — covers actual transaction costs. The rest covers credit card rewards programs for a select few shoppers, marketing (including more than 6 billion direct-mail solicitations each year), and generous profits for the card companies and banks.
Why can't customers just make their own judgments about these fees? Because they don't know about them. Although interchange fees dwarf all other card fees charged by banks, credit card company rules effectively prohibit merchants from telling customers about them.
The card companies' agenda is to maximize this income by continually increasing these fees and encouraging consumers to pay for everything with plastic, even the smallest purchases such as a fast-food meal or even a single item costing less than a dollar.
Card companies' interchange averages about 2% per transaction and up to 3% for cards with rewards programs. The total cost of interchange crossed the $30 billion mark in 2005 and will be twice that amount before the decade ends unless these abusive practices are stopped.
Consumers may appreciate the convenience of using credit cards, but they do not know the steep cost that comes with doing so because interchange fees are hidden. All consumers pay the fees whether they use plastic or not. In the end, retailers are forced to build them into the cost of all transactions, because card company rules prohibit surcharges on plastic payments and effectively prevent retailers from offering discounts to consumers who pay by cash or check.
The Food Marketing Institute (FMI) and associations across every retail sector are now waging a campaign for fair and transparent interchange fees through the Merchants Payments Coalition (MPC), composed of nearly 30 trade associations operating 2.7 million retail outlets.
Congress began investigating this issue last year in hearings before the House Subcommittee on Trade and Commerce and the full Senate Judiciary Committee. Members of Congress learned how these fees are fixed through anticompetitive practices that are being challenged as violations of the federal antitrust laws in more than 50 lawsuits against Visa, MasterCard, and their card-issuing banks. They also learned that Americans pay among the highest fees in the industrialized world despite advanced technology and economies of scale that should make them the lowest. The other major industrialized economies have already declared this system to be an illegal cartel and moved to place reasonable limits on the fees that can be charged. Congress is continuing its investigation this year with more hearings and other measures.
This issue is particularly poignant for IT leaders in the retail industry, for the cost of interchange erases the savings generated by some of their greatest innovations. Merchants would welcome your voice in advocating reforms. To learn more and join the campaign, visit the MPC Web site at www.unfaircreditcardfees.com.