Retailers Look to Save by Cutting Credit Card Fees
Retailers look to trim every cost of business from their leases to their lighting, but one crucial cost that is increasingly under the microscope is processing fees charged by credit card companies and banks.
American consumers and merchants pay more for credit card fees—called interchange fees—than consumers and retailers in other industrialized economies, according to a recent study released by Merchants Payments Coalition.
Two laws currently making their way through Congress were drafted to assist businesses renegotiate those fees.
U.S. Rep. John Conyers Jr. (D–Mich.) introduced HR 2695, the “Credit Card Fair Fee Act of 2009.” The proposed legislation was written to create a system in which merchants can collectively negotiate with banks over interchange fees. Sen. Dick Durbin (D–Ill.) introduced “The Credit Card Fair Fee Act,” S1212, which also intends to create a structure for merchants to bargain with banks.
The Electronic Payments Coalition is a Washington, D.C.–based group that represents banks and credit card companies. It said interchange fees are merely a cost of doing business and that an average American interchange rate is 1.6 percent.
But according to the MPC study, released Sept. 14, interchange fees in the United States cost 2 percent of every transaction, compared with 0.5 percent charged per transaction in Australia and a 0.3 percent fee in the European Union.
The study claims banks and credit card companies made $48 billion from American fees in 2008, which is triple what they made from these fees in 2001. The Washington, D.C.–based MPC is supported by retail trade groups such as the National Retail Federation, Retail Industry Leaders Association and California Retailers Association.
California boutique owners are watching the fight over interchange fees with interest, and they renegotiate their interchange fees with varying degrees of success.
Fred Levine is co-owner of the M.Fredric chain of boutiques, based in Agoura Hills, Calif. He said renegotiating interchange fees is a crucial part of doing business. “It’s kept our rates low,” Levine said. M.Fredric has done business with Wells Fargo for more than a decade. He fields calls daily from other financial institutions that promise lower rates. Requesting his bank compete against other offers has helped keep rates low. But the success of his company has created better terms for processing fees.
“We pay a fraction of what we paid in the 1980s,” he said. “We used to pay 4.5 percent for American Express cards and 2 and 3 percent for Visa and Mastercard. Our rates have gone down significantly based on the volume of the business and the average size of the ticket.” He did not divulge what the interchange rates were for his store.
Alison Muh is owner of Surly Girl, a Los Angeles boutique and accessories brand. She said lowering transaction fees by 1 percent meant great savings for her business. However, she said it was a hassle negotiating with processing companies. “The fine print in your contract often has hidden or misleading terms and cancellation fees,” she said.
Diane Merrick is the owner of the Diane Merrick boutique in Los Angeles. She said her processing fees were fair and the various offers to negotiate bank fees never seemed to result in important savings for her one-store boutique business. “It’s major, major work to change, and it ends up with very little change in monthly fees,” she said of renegotiating fees. “This is an important thing for big, big guys. For the little guys, it’s not a big deal.”Bringing in negotiators
There are better ways to cut fees than going through tough negotiations with finance companies, said James Van Dyke, president of Javelin Strategies, a Pleasanton, Calif.–based research firm and consultancy that specializes in the financial-services industry.
He suggested retailers restrict consumer choice to payment methods with cheaper interchange fees. He said the PayPal payment systems and Arco service stations often nudge their customers to make purchases from debit cards or payment options cheaper than the higher-cost credit cards.
The nudging often means offering lower prices to those using preferred-payment systems. Other times, it takes nothing more than a simple request, he said. “A high-end retailer might post a sign in elegantly scripted gold lettering saying: ’For convenience and safety, [this boutique] respectfully recommends that our valued customers use “XYZ” card,’” he said. Shoppers often take note of the sign and comply.
Reuven Cypers said he believes many retailers, large and small, need consultants to help guide them through the fine print of negotiating processing fees. Since 2001, his Los Angeles–based Associated Merchant Services, a division of Rocky Mountain ATM, has helped retailers find savings from several hundred dollars per month to $300,000 annually by knocking down processing fees.
One basic way to cut processing costs is to not lease credit card transaction machines from fee-processing companies. Cypers said buying machines often can be more reasonable than leasing. Buying a machine can cost $300, compared with leasing a machine, which can be $50 for a common period of 48 months. Like Van Dyke, he recommended nudging customers to use debit cards rather than higher-cost credit cards.
Associated Merchant Services consults with 2,500 merchants, and Cypers said business is growing. “When the economy is doing well, many merchants were not as concerned,” Cypers said about processing fees. “With the economy tightened so dramatically, everybody is concerned with how to save money and help the bottom line.”
