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.

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.

HR 5546 is also known as the Credit Card Fair Fee Act of 2008. This bill would require Visa and MasterCard to negotiate with merchants and reach an agreement on credit card terms and conditions. If an agreement is not reached, both sides will be required to submit their final offers to binding arbitration by a three-judge panel appointed by the Department of Justice and Federal Trade Commission.

Before a bill is passed it has to go through several phases:

1. It has to be introduced
2. Reported by committee
3. Voted on in House
4. Voted on in Senate
5. Signed by the President

HR 5546 is currently up for vote in the House. Before a bill can be passed, I think it is important that merchants, as well as the National Retail Federation, understand Interchange. This bill also seems more like a hostage situation. Retailers will be holding the Associations hostage until their demands are met. If passed, it may do more harm to consumers needing to pay with credit cards if these large retailers don’t get their way on fees. The arbitration may be drawn out, costing each party involved needless legal expenses. In a credit card driven society, we may be stabbing ourselves in the foot.

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.

Since there are many different processing categories for Interchange rates, they can be confusing to most merchants. Merchants pay higher or lower rates depending on, but not limited to, whether or not it was a rewards card, purchase card, or debit card. Rates can also be assessed based on your SIC code and how often you batch your terminal.

I would recommend that all merchants become familiar with the Interchange rate for their industry, as well the manner in which they take their cards (swiped or keyed). This way you can negotiate your rates with your merchant services provider accordingly. Just because your payment processor claims the rates went up does not mean they went up for your type of business. Some processors may even entice merchants with low rate like 1.11%, only to have you start processing and realize that rate does not pertain to your type of business.

Fortunately there are a lot of processors out there that don’t hide fees from their merchants. It is important for merchants to be educated about card processing fees.

If you have received a statement with an increase notice on it, be sure to do your research so you know exactly what is being increased.