Merchants have been complaining for years about the cost of interchange fees and unnecessary profits the banks are earning.  Interchange fees are not regulated by the federal government, which in turn provides Visa, MasterCard and the issuing banks the right to raise fees for any reason.  Merchants and advocate groups claim that capping interchange fees would lower merchant costs and help prevent – or limit – bank profits from unnecessary fees.  For example, credit card companies and the banks that sponsor gas credit cards collect as much as 8 cents per gallon for interchange fees.  The Retail Industry Leaders Association said that last year “Visa and MasterCard represented 71 percent of the credit card market and 88 percent of all interchange fees were collected by the top ten managing banks.”

In 2008, U.S. merchants paid an average interchange rate of 1.82 percent per transaction, according to the Nilson Report, a Carpinteria, Califorinia-based newsletter that tracks the industry.  “A significant advantage of capping or limiting interchange fees would be that it would reduce interchange fee costs most directly,” the report said.  However, this type of legislation could create fees elsewhere in the cycle.

“U.S. card issuing banks receive an estimated $40 billion to $50 billion in income annually from interchange fees.”

A 2003 law to curb credit card fees in Australia was initially intended to lower costs for merchants – hopefully creating a more competitive pricing market.  The law has backfired a bit.  Australian consumers are seeing new costs associated with using a credit card.  Banks have added annual card fees, cut card perks and reduced rewards programs, like frequent-flier miles. The Australian central bank also allowed merchants to impose surcharges to card users.  Merchant fees for American Express and Diners’ Club were not affected because interchange fees are only related to Visa and MasterCard.  However, both card companies decided to reduce merchant fees to avoid losing customers to Visa and MasterCard.

Following the introduction of the Credit Card Interchange Fees Act, President Obama signed the Credit Card Accountability Responsibility and Disclosure Act of 2009, which directed the Government Accountability Office (GAO) to conduct a study of credit card interchange fees.  In November, the GAO released their report.  The GAO assessed four options to address merchants’ concerns:

• Limit or cap interchange fees
• Require the disclosure of interchange fees to consumers
• Prohibit card networks and other entities from imposing rules on merchants that limit their ability to discriminate among the different types of cards, or levy a card surcharge
• Allow merchants and issuers to directly negotiate interchange fees

The GAO determined that proposals to cut credit card merchant fees will be hard to implement.  The report did not conclude, however, if merchants were likely pass on any savings they obtained through lower fees to consumers or encourage consumers to decrease their use of higher rate cards.  They did conclude that disclosing interchange fees to consumers could be confusing and, of no surprise, interchange fees “account for the largest portion of the [merchant] fees for [the] acceptance of Visa and MasterCard credit cards.”

Congress is currently considering three bills that would regulate interchange.  If U.S. regulators put limits on fees or rates, the banks will find another way to generate revenue.  U.S. card issuing banks receive an estimated $40 billion to $50 billion in income annually from interchange fees.  The banks and card companies are obviously against any bill proposing fee and rate limits.  Reflecting on the aftermath of the new credit card rules in Australia, the U.S. Congress has the difficult task of deciding what to do.

It is estimated that PIN-based debit transaction Interchange costs have gone up nearly 85% in the last year alone. The rise could be attributed to a large consolidation between debit networks. Whenever there is consolidation, there is typically less competition and the result is higher PIN-based debit costs to processors and higher interim costs to merchants. Interlink’s current fee is nearly $0.76 per transaction and Pulse’s is over $0.64. Many merchants have become accustomed to paying flat fees for PIN-based debit transactions but in the coming years that will be a thing of the past.

Online merchants can take advantage of PINless debit solutions by having the option of using networks such as Star, NYCE, and Pulse and not having to pay traditional Interchange fees. This is beneficial to e-commerce merchants because payment is immediate, unlike e-check or ACH which can take a few days. The funds are also verified and clients do not have to give out checking account information. These features are currently limited to certain business types, such as utilities (water, gas and waste management), Education, government payments (taxes, fines, licenses), insurance (auto, life, and health), health club memberships, and internet service providers.

It is still beneficial to add a PIN pad to your terminal if you are a large ticket business. This will ensure you are paying the lowest rate possible. Some processors will offer a low PIN-based debit transaction fee. Often the merchant will still have to pay debit network pass-through fees.  If the PIN-based debit fee you are quoted sounds too good to be true, it probably is.

Many large credit card companies, such as Capital One, are disclosing a rise in delinquencies for November of 2008. Issuers, like American Express and Bank of America, are raising rates on existing balances and slashing credit lines in the short term. Banks are expected to cancel $2 trillion in available credit over the next year. If credit card issuance is being cut and rates will soon be regulated, it only seems inevitable that banks will turn to raising Interchange rates on merchants to cushion the fall.

Although merchants can’t do much about rising interchange rates, they can begin to take Pin based debit cards instead of credit cards to ease the fees. Offering gift cards and loyalty cards are also becoming very popular. The Federal Reserve and Office of Thrift Supervision are already fighting the battle of Interchange rates. Small business owners may not like the rate hikes, but banks may have no choice. The money has to come from somewhere and it certainly cannot keep coming from government bailouts. What happened to taking responsibility for your own credit and debt?

It is arguable that banks should be able to adjust interest rates as they assess the risk of customers on an ongoing basis. What stops banks from misusing the power to adjust rates? Or is this a great level of protection for all consumers in an economic downturn? As the credit crisis continues to go round and round only coming years will tell what can be done to solve the situation.

Federal regulators jumped into action and passed laws to protect consumers from increased interest rates on existing account balances. Government rules seem to run at a snail’s pace as these laws will not take effect until July 1^st 2010; that’s a lot of money in the banks’ pockets in the interim. Millions of card holders will get raked over the coals, paying high fees on previously made purchases until these laws kick in.

Credit card companies will still be able to raise rates on new credit cards, future purchases or cash advances. Finally, the Federal Reserve and National Credit Union Administration are cracking down on arbitrary hikes in interest rates. It would seem that we  have learned a lot from subprime lending. These rules will also stop the issuing of credit cards to people that all ready have a large amount of debt, and who were previously getting approved by banks for high interest rate cards.

Some of the new rules include:

• Consumers will have to be given 45-days notice before any changes will be made to the terms of their account.
• Rate hikes will still be allowed on cards with payments more than 30-days late.
• Late fees cannot be charged without giving at least 21 days to make a payment.
• Most cards currently charge a different rate for different balances, such as purchases versus cash advance transactions. Card companies will now be required to apply any payment above the minimum amount due proportionally to all balances, or to the balance with the highest interest rate.
• Finance charges can’t be assessed on paid-off balances from prior months on a current month’s billing cycle

Credit card companies take huge risks in issuing credit to people who have below average credit, so they hike up the interest rate for everyone to make up for their losses. Because these guidelines are being tightened, banks will have to be more cautious as to whom they give credit to. With less credit circulating around, we will ultimately have fewer purchases at retail locations. Hardest hit will be the online businesses since some purchases can only be made using a credit card. The other areas it will affect will be revealed in time.

Overseas, many organizations have formed campaigns against Visa and MasterCard. In Canada, ad campaigns are being run by The Retail Council of Canada telling Visa and MasterCard to “stop sticking it to retailers.” The Retail Council of Canada is a non-profit association that represents more than 40,000 stores of all retail formats.

In Europe, ongoing Interchange battles have reached boiling points. EuroCommerce, the retail and wholesale governing body, is accusing MasterCard of raising interchange rates 160% after the release of MasterCard’s new interchange fee structure. On December 19^th, 2007, an agreement was signed prohibiting MasterCard’s multilateral interchange fees (MIF). These fees apply to almost all cross-border card payments in the European Economic Area (EEA). This card type was prohibited because it is said to inflate the base on which acquiring banks charge. Since 85% of businesses accept these card types in Europe, it is said to potentially harm businesses and their customers. Naturally, MasterCard will raise other card type fees in order to compensate for money lost on fees from MIF.

Australia has already won their battle against interchange. Fees in Australia are capped, and in some cases they pay half a percent. Of course lower interchange rates, in my opinion, have been the result of fear. Card associations are afraid that regulations will be imposed if they do not lower their fees.

It’s only a matter of time before Visa and MasterCard will have similar regulations imposed upon them. But, are these fees price gauging or just a fair network of profit? It seems to me that we are all happy with our sky miles and rewards point, but are oblivious to where money for these rewards comes from. The people that are coming up with these regulations could be forgetting we are in a capitalistic society. Would we haggle over the price of our dinner at a high end restaurant saying the restaurant charged too much, after we already read the price on the menu? Merchants are aware of the rates they are going to pay before they sign their agreements. Perhaps we need to do a better job of educating merchants about Interchange fees and what they are used for.

Here is a list of common terms you should know when talking to credit card processing companies:

• Qualified Rate – This is typically the rate you are quoted when you sign up for a merchant account. This rate only applies to swiped regular retail cards. Be sure to ask what your Mid-Qualified and non-Qualified rate will be.
• You may also be charged an Authorization fee. This is the amount charged to a merchant account each time communication happens between the software or point of sale terminal and the authorizing network. Make sure you are not charged an additional transaction fee because the two are the same.
• Your sales agent may refer to Basis Points. Basis points are the percentage that you are charged on a credit card transaction. One basis point is equal to 1/100th of 1 percent. Thus a rate of 1.85% is equivalent to 185 basis points. For some merchants, a basis point mark above Interchange is advantageous.
• Batch Closure fee – This is a fee charged each time a settlement or end of day processing totals are sent to the financial institution.
• Electronic Data Interchange (EDI) – The electronic communication of business transactions, such as orders, confirmations and invoices.
• Transaction Fee – A per transaction amount charged by the bank for processing each transaction. This amount is in addition to the discount rate. For example: a discount rate of 1.85% plus 30 cents per transaction. Make sure you are not being charged an Authorization fee as well.
• PCI Compliance Fee – This fee is usually assessed by your merchant bank because they are passing on a fine they received from the card associations. Make sure to dispute this with your processor if you see it on your statement.

Knowing the merchant processing industry lingo is just one way to protect your business from getting ripped off.  Always remember to read the fine print and get a second opinion.

One of the most interesting scams that has come up frequently is related to hidden merchant fees. This scam entices merchants to apply for accounts at low rates with a brief quote. They conceal fees, rates, and many various extra charges. When applying for a merchant account, is important to stay away from advertisements that claim to have the lowest rates around. Some key fees to ask for are: discount rates, mid qualified rates (keyed rates), non qualified rates (rewards card and purchase card rates), transaction fees, setup fees, annual fees, statement fees, services fees, PCI Compliance fees, merchant club fees, and early termination fees.

Many times, merchants will receive a lengthy terms and conditions document. There are usually many different fees within the fine print of this document. You should request the terms and conditions document in advance and make sure to read through it carefully. You don’t want to be caught with a lot of unexplained and unexpected expenses.

Also beware of the “Hold Back” or reserve account. Some scams prey on e-commerce merchants looking for the lowest rate. Once the merchant finds the rate they are looking for, they fill out a surprisingly short online application. A high reserve is requested in order to grab the maximum amount of money without arousing the merchant’s suspicion. All of the sudden the merchant account provider disappears,  the telephone number is disconnected, and your money is gone. It is important to find out what bank your card processor is registered through, and who will actually be responsible for your money if they should happen to disappear.

Some of the main increases have been Corporate Card Non -Travel Level 2 with an increase of .05%, Purchasing Card Retail with an increase of .10%, and Business Standard T&E with an increase of .25%. Card types such as Corporate Card Retail had a decrease of .10%.  Although the CPS Automated Fuel Dispenser Credit category went down significantly on their rate by .35%, they raised their transaction fee by .20 cents.

Many merchants that take the card types in the increased categories may want to contact their merchant services provider to see what their total increase will actually cost them.

MasterCard has changed rates in the Consumer Core Value, Enhanced Value, World Card and World Elite cards. These card types primarily affect the insurance and utility SIC codes. If you are in one of these industries, your merchant processing charges may significantly increase. Previously, MasterCard had a Program Registration ID requirement for utility companies to be eligible for special, and sometimes lower, Interchange rates. This is no longer a requirement.

Some merchant processing providers will absorb the cost of any increases, but many do not. Since most of the increases are with card types that are generally considered to be Non-qualified, many processors are passing on an increase to all Non-qualified card types whether they received an increase or not.  I’ll keep you posted with more increases, decreases and updates.

Several new categories will take effect October 3^rd, 2008. Debt Repayment, Government to Government, and Tax Payment are some of Visa’s new categories.

• Debt Repayment -This category allows agencies that take payment for auto loans, student loans and mortgages to pay a lower rate. This Interchange category does not apply to past due debt such as items in collections.
• Pay at the Pump – This fee is a reduction. Consumer credit cards used at gas pumps have been lowered by as much as .50 basis points. Prepaid gas cards will also now be to “Partial Authorization.” Some examples of these types of cards are Shell Cards and Wright Express cards.
• Tax Payments – This program is a requirement for all merchants. There will be no cost for the program until April 1, 2009, but a convenience fee may be assessed. This fee may vary for consumer credit cards and commercial credit cards. For consumer debit transactions, a flat fee may be assessed and cannot exceed $3.95.
• Government to Government – This category has gone up by .25 basis points for transactions over $8,750. The $5,000 minimum has been removed and Level 2 and Level 3 data is not required.

MasterCard has not announced any major additions yet, but reports say that there will be increases in PIN based debit rate for the Maestro debit network. Grocery and Warehouse merchants will be billed at $0.28 per transaction. Other retail transactions will still be billed at .75% and a 0.175 per item fee. MasterCard is also eliminating QSR and Retail maximum PIN debit rate categories.

I will have more updates on rate increases and decreases in future posts.