April 16, 2007
Credit Card Cos. and Banks Take Heat for Fees
Last week, the National Association of Convenience Stores (NACS) issued a report that said credit card fees paid by convenience stores exceeded the industry’s total profits. Total credit card fees by chains and independents in the convenience channel reached $6.6 billion in 2006.
At roughly the same time as the report from NACS was being made public, the Food Marketing Institute (FMI) put out a press release providing an overview of proposed legislation in 10 states to address what the association described as excessive, hidden credit card interchange fees.
“Retailers welcome state scrutiny of credit card company abuses, especially measures to require full disclosure and reduce interchange fees,” said FMI president and CEO Tim Hammonds. “For too long, Visa, MasterCard and their card-issuing banks have fixed interchange fees under the cloak of secrecy. The predictable result: the cost of interchange now dwarfs that of all other credit card fees.”
While FMI supports the action of legislators in the 10 states, the trade group is looking for Congress to take action on the federal level.
According to FMI, consumers are largely unaware of interchange fees associated with credit and debit card transactions. As a result, they are also unaware that retailers need to factor in these fees when determining pricing.
Discussion Questions: Are most consumers unaware of credit card interchange fees and its impact on the prices they pay at retail? Are the fees excessive, as charged by FMI? Is state and/or federal legislation needed to address the issue or is there a preferable market-based solution available?
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Not too many people are aware of the interchange system existing in Credit Card transactions (I was not aware of the complexity of open-loop networks like MasterCard and VISA until I worked at Citi-Cards). There are basically open-loop networks like MasterCard and VISA that have different parties, like issuing banks (card issuers), merchant banks (that pay the merchant) and associations that process the transactions. Then there are closed loop networks like Discover and America Express that do the full-cycle from issuing cards to processing payments to paying merchants (although Amex may now be considered open-loop since other banks like MBNA and Citibank have started issuing Amex cards). So there is some justification in the interchange being charged; they are the costs of processing the transactions and absorbing the risk until the consumer pays for their transaction. This is why Associations like MasterCard and VISA retain part of the interchange (processing costs) and the issuing bank gets a large share of the interchange fee (risk-based costs). But nobody has really done a proper valuation on whether the fees are truly reflective of the transaction costs and risk premium involved. So in the interests of the consumers, some regulation in this area might be a welcome change. For more details of credit card payment process there is an excellent paper by the
Philly Fed.
Credit card interchange fees are rising. The card companies need to pay for the free airline tickets, rebates, “points for gifts” and rising card marketing costs. So they pass this overhead onto the retailers. Only 4 companies control the market: Visa, American Express, MasterCard, and Discover. All 4 know every minute what the other 3 are doing and need to escalate their marketing tit for tat. The rising interchange fee headache will continue to get worse and worse until retailers join together more effectively. That’s why many retailers joined Retex: there’s strength in unity.
The customers think it’s free to me for them to use their plastic. I know if I could charge a surcharge for credit card use under a certain amount–they’d use cash. And it’s really only fair.
In my store over the past 5 years, credit card processing fees have risen. The volume I do on credit cards has risen. The average overall transaction has risen…but the average credit card ticket is dropping.
I feel that my customers’ rewards for using their credit card are coming right out of my till.
If this is such an unfair practice then why doesn’t someone jump in and start a discount processing company? Either this has happened and the new companies don’t want to mess with these chain retailers OR the fees really aren’t high enough to allow other providers to enter the market and make a profit. Retailers whine about cost that they don’t pay (all of this passed on to the consumer) but don’t have the guts to do anything about it. Sam’s Clubs used to only take Discover Cards. Why don’t the C-stores band together and fund a new card or stop taking MC, Visa, etc.? Maybe they should team up with Wal-Mart and get into the banking business.
With regard to the statement that fees from C-stores sales exceeding the Credit Card Companies’ bottom line profit–how stupid is that? Gee, my income in 2006 exceeded that of Ford Motor Company. I guess comparisons like this erode any confidence anyone might have in a retail organization. It would sure make me hesitant to invest in a group of companies who don’t know the difference between revenue and profit and try to compare one to the other.
As long as consumers keep getting 5% back in rebates every time they use plastic they probably could care less what the fees are. They know if they pay with cash, they lose money.
Most consumers are probably either unaware or not well informed about the relationships involved with credit cards, cost to retailers, and end-user pricing, however, until the pipeline offers cash discounts to consumers, which I don’t necessarily recommend, or until the economy has other practical working alternatives for consumer convenience, there is no chance that the majority of consumers would trade the convenience of credit cards for generally lower prices.
Until I entered the retail loyalty marketing world a year or so ago I was mostly unaware of interchange fees. I believe this to be the case for most consumers. Furthermore, they have no idea that reward cards carry even higher fees or that the 3 digit security code on the back reduces those fees somewhat. Consumers often use the card they feel gives them the best reward or the one they have the lowest balance on. Merchants need to be more proactive to find ways to curb these costs. That is one of the key reasons we market our new loyalty “CashValue” card program to a coalition of merchants that can accept the card as a form of payment and pay no transaction fees. Retail coalitions have not yet gained a stronghold in the USA but they will. Coalitions will allow more merchants to work together to further reduce many different operational and marketing costs.
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Not too many people are aware of the interchange system existing in Credit Card transactions (I was not aware of the complexity of open-loop networks like MasterCard and VISA until I worked at Citi-Cards). There are basically open-loop networks like MasterCard and VISA that have different parties, like issuing banks (card issuers), merchant banks (that pay the merchant) and associations that process the transactions. Then there are closed loop networks like Discover and America Express that do the full-cycle from issuing cards to processing payments to paying merchants (although Amex may now be considered open-loop since other banks like MBNA and Citibank have started issuing Amex cards). So there is some justification in the interchange being charged; they are the costs of processing the transactions and absorbing the risk until the consumer pays for their transaction. This is why Associations like MasterCard and VISA retain part of the interchange (processing costs) and the issuing bank gets a large share of the interchange fee (risk-based costs). But nobody has really done a proper valuation on whether the fees are truly reflective of the transaction costs and risk premium involved. So in the interests of the consumers, some regulation in this area might be a welcome change. For more details of credit card payment process there is an excellent paper by the
Philly Fed.
Credit card interchange fees are rising. The card companies need to pay for the free airline tickets, rebates, “points for gifts” and rising card marketing costs. So they pass this overhead onto the retailers. Only 4 companies control the market: Visa, American Express, MasterCard, and Discover. All 4 know every minute what the other 3 are doing and need to escalate their marketing tit for tat. The rising interchange fee headache will continue to get worse and worse until retailers join together more effectively. That’s why many retailers joined Retex: there’s strength in unity.
The customers think it’s free to me for them to use their plastic. I know if I could charge a surcharge for credit card use under a certain amount–they’d use cash. And it’s really only fair.
In my store over the past 5 years, credit card processing fees have risen. The volume I do on credit cards has risen. The average overall transaction has risen…but the average credit card ticket is dropping.
I feel that my customers’ rewards for using their credit card are coming right out of my till.
If this is such an unfair practice then why doesn’t someone jump in and start a discount processing company? Either this has happened and the new companies don’t want to mess with these chain retailers OR the fees really aren’t high enough to allow other providers to enter the market and make a profit. Retailers whine about cost that they don’t pay (all of this passed on to the consumer) but don’t have the guts to do anything about it. Sam’s Clubs used to only take Discover Cards. Why don’t the C-stores band together and fund a new card or stop taking MC, Visa, etc.? Maybe they should team up with Wal-Mart and get into the banking business.
With regard to the statement that fees from C-stores sales exceeding the Credit Card Companies’ bottom line profit–how stupid is that? Gee, my income in 2006 exceeded that of Ford Motor Company. I guess comparisons like this erode any confidence anyone might have in a retail organization. It would sure make me hesitant to invest in a group of companies who don’t know the difference between revenue and profit and try to compare one to the other.
As long as consumers keep getting 5% back in rebates every time they use plastic they probably could care less what the fees are. They know if they pay with cash, they lose money.
Most consumers are probably either unaware or not well informed about the relationships involved with credit cards, cost to retailers, and end-user pricing, however, until the pipeline offers cash discounts to consumers, which I don’t necessarily recommend, or until the economy has other practical working alternatives for consumer convenience, there is no chance that the majority of consumers would trade the convenience of credit cards for generally lower prices.
Until I entered the retail loyalty marketing world a year or so ago I was mostly unaware of interchange fees. I believe this to be the case for most consumers. Furthermore, they have no idea that reward cards carry even higher fees or that the 3 digit security code on the back reduces those fees somewhat. Consumers often use the card they feel gives them the best reward or the one they have the lowest balance on. Merchants need to be more proactive to find ways to curb these costs. That is one of the key reasons we market our new loyalty “CashValue” card program to a coalition of merchants that can accept the card as a form of payment and pay no transaction fees. Retail coalitions have not yet gained a stronghold in the USA but they will. Coalitions will allow more merchants to work together to further reduce many different operational and marketing costs.