October 23, 2009
-
Back-Burner Interchange Fees Still Causing Heat, Pt.1
What's the real issue?Credit card interchange fee strife has been bandied back and forth for years now and, yet, never has been seriously addressed. Interchange fees are the margin that retailers must pay for accepting credit card sales. Typical rates are 1.6% but can rise as high as 2.4% of the cost of a transaction. The proceeds from these fees are divided between the customer's credit card issuing bank, the merchant's payment processor (like Heartland) and contracted back-end bank. Although the card associations (like VISA and MasterCard) are not paid directly from these fees, the issuing banks must pay them (presumably from the interchange fees the banks, themselves, receive).
At issue, here, is not the mechanism. This is the way the system works and rewards flow to every participant: The consumer; the merchant; the credit card issuing bank; the payment processor; the back-end receiving bank and, indirectly, the credit card associations themselves. Everyone benefits.
The rub, here, is the lack of latitude afforded to the merchant. Not all merchants are "created equal" and, yet, the "one size fits all" rule is applied. Some merchants like concession stands in movie houses can enjoy a 99% profit margin and don't even notice a little 1.6% fee taken out. On the other hand, many retailers must operate on only a 2.5% profit and a 1.6% fee eats up over half of their livelihood. "High-Rewards" credit cards with fees around 2.4% leave these merchants with virtually no margin at all. That's why many gas stations will charge 4 cents more on a gallon for credit card purchases. That equates to around 1.6% fee which is taken out of them.
So it is that these merchants have a legitimate cause. They are handed all the rules and there is no wiggle room for negotiations or bargaining over fee structure nor which credit cards they may decline (different cards come with different interchange rates).