Ed Des Roches has been accepting credit cards at his women’s fashion stores for years. When he was first being pitched on their use at his Vancouver-based chain of Plum stores, he was sold on the idea that accepting Visa and MasterCard would increase sales.
But now he prefers his clients to pay by Interac debit.
For Des Roches, and the tens of thousands of merchants across the country, the reason is simple economics: debit payments are a fixed cost of mere pennies; with credit card payments, the sky’s the limit.
Depending on the size and sales volume of a merchant, the per-transaction price for debit ranges between $0.07 and $0.20. Des Roches said he was able to negotiate a debit fee of only $0.08 per transaction.
But he said he has neither the control nor the ability to accurately predict his monthly credit card fees. That makes it difficult for him to establish competitive pricing and run his business efficiently.
New fee structure costs retailers
Visa and MasterCard have come under fire from merchants in recent years over new fee structures for the various types of credit card issued by banks and credit unions.
For example, in 2008, Visa created seven separate merchant categories that each had a distinct interchange fee – a percentage of a merchant’s credit card transaction that’s paid to the customer’s bank. The fees ranged from 1.21% for gasoline merchants to 1.65% for retailers that accepted credit card payments by phone or online. At around the same time, Visa introduced its premium Infinite card. Its interchange fees range from 1.41% for gasoline merchants to 1.85% for transactions where the merchant doesn’t swipe the card in person.
MasterCard’s basic interchange rates are similar. They range from 1.21% for gasoline merchants to 1.72% for standard credit card transactions. However, for its premium cards, the per-transaction interchange rate is as high as 2.65%. While merchants pay other transaction fees to the payment processors that provide the point-of-sale terminals, the interchange fees set by Visa and MasterCard account for the bulk of the service fees retailers pay for each credit card transaction. With premium credit cards from Visa and MasterCard, merchants can face per-transaction fees of up to 3.5% and even higher for American Express cards.
While that arrangement might make sense for the credit card network providers, it creates a practical problem of survival for merchants. Because there are more than 200 types of credit cards available from banks and credit unions in Canada and because costs vary depending on the type of credit card a customer uses, merchants have no way of realistically estimating their transaction costs each month.
“It’s often a surprise,” Des Roches said. “I don’t know how much [the costs are] until I get the bill, which creates a problem when I do my pricing, because I have to accommodate for [the credit card costs], and you can’t anticipate it.”
Brian Weiner, Visa Canada’s head of strategy and interchange, said the new fee structure was designed to create more flexibility that better reflected merchant costs and risks than the previous one-size-fits-all approach.
He noted that while the changes affected different retailers in different ways, overall the fees are “revenue neutral” to the system. Weiner was quick to point out that while credit card companies set the interchange fee, credit network providers like Visa and MasterCard receive none of it.
It goes straight to the bank to cover its costs of providing credit cards to consumers.
Those costs include:
•creating and mailing the cards;
•marketing;
•fraud liability insurance;
•call centres; and
•extending unsecured credit to cardholders.
“So there are a lot of the costs borne on that side of the equation and relatively little revenue coming in because of the fundamental premise that consumers need to be given the card.”
Weiner added that interchange fees for premium Infinite cards and corporate credit cards are higher because of their higher fraud risks.
“I don’t buy it,” simmered Des Roches. “I really don’t.
“We can pay as much as 1.5% more because of the premium card, which should be lower risk. But we’re actually paying more, because of the points and the marketing, and there is no ceiling to that. There is no end to what they can charge. That’s a fundamental problem, because rather than paying for the advantage of giving customers credit, we are now paying for all the miles, points and marketing they’re doing to sell the cards. All that is being passed on to the retailer.”
Weiner declined to disclose how Visa sets interchange fees. But he said each card has a different cost and a different value for merchants.
That explanation rings hollow for retailers, who complain that the secretive way interchange fees are set creates a hidden cost they’re forced to accept.
Competition Bureau push panned
The competition commissioner’s case against Visa and MasterCard aims to help merchants mitigate those costs. In her application to the competition tribunal, Competition Bureau commissioner Melanie Aitken wants Visa and MasterCard to allow merchants:
•to apply a surcharge to customers at the point of sale if they choose to pay with their credit card; and
•to decline credit cards that carry higher interchange fees, which would eliminate a basic Visa and MasterCard stipulation that merchants must accept all types of branded credit cards.
But both options create new problems for consumers and might not help retailers mitigate the costs of accepting credit cards.
Vancouver’s Bruce Cran, president of the Consumers Association of Canada, said placing a surcharge at the point of sale would increase prices for consumers who use credit cards.
He was skeptical retailers would reduce their prices if they were allowed to add surcharge for credit card payments. Cran said that, if anything, merchants could make money from instituting surcharges.
A November 2010 report by the Australian consumer group Choice, which was commissioned by the New South Wales Office of Fair Trading, found that since surcharging was allowed in Australia in 2003, a third of consumers (32.7%) have had to accept surcharges of between 4% and more than 10% at the point of sale, far higher than the average 2% cost of accepting credit cards.
Canada’s Competition Bureau contends that surcharging would benefit small and medium-sized businesses (SMEs), but the Choice report found that larger retailers were more likely to apply surcharges than smaller competitors.
“It’s become a huge profit centre for a lot of companies,” Cran said. “If the Competition Bureau gets its way, there’s no benefit to consumers.”
From a merchant’s perspective, even if retailers were allowed to surcharge, most wouldn’t because it would be a competitive disadvantage. The Choice report noted that seven years after surcharging was allowed in Australia, 80% of SMEs and 60% of large merchants still didn’t surcharge credit card customers.
While the competition commissioner was unavailable to speak to BIV about the issue, a Competition Bureau spokesman said that regardless of whether merchants would apply credit card surcharges, they’re contractually prohibited from doing so, which the bureau contends is anti-competitive.
Last week, the Canadian Federation of Independent Business released a table listing the average merchant fees for the hundreds of credit cards on the market. But even with that list, having the option to decline some credit cards would be impractical.
“I can’t expect my staff to be able to identify it,” Des Roches said. “And would I reject it anyway? Probably not.”
Compromise needed
If surcharging and removing the merchant requirement to accept all credit cards are not answers to reducing credit card costs, what is? Possible alternative solutions include having the government regulate credit card interchange fees and eliminating credit card reward points.
In 2003, Australia allowed surcharging and began regulating interchange fees for the country’s credit card providers. The changes transformed the industry, and the number of credit cards available on the market dropped.
But while Visa and MasterCard argue that regulating interchange fees would hurt their business, Reserve Bank of Australia statistics suggest that credit card use did not decline as much as the credit card companies had feared. And while premium reward cards disappeared for a few years, they’re returning to the market, albeit with much higher annual fees. Nevertheless, studies suggest that piecemeal changes could open a Pandora’s box of issues that would hurt merchants and consumers alike.
For instance, a 2008 Federal Reserve Bank of Kansas City research paper warned of the unintended consequences from improperly setting interchange fees or too tightly regulating reward programs.
In the past year, a federal task force has been looking into the future of Canada’s payment system. By the end of the year, the group set up by federal finance minister Jim Flaherty will present recommendations that will also address merchant fees on credit cards.
Des Roches, who participated in the Vancouver roundtable, said the government should focus on the interchange fee rather than create solutions that ding consumers at the point of sale. He said the fee should include only the costs associated with providing credit to consumers. The banks that issue credit cards should absorb the costs of marketing the cards and all the rewards they offer consumers.
“There’s no way retailers should be paying for the marketing,” said Des Roches. “Customers have a relationship with their bank and their credit card provider, but when they walk into my store, they’re my customer. When they come to pay, every customer should be treated equally. If they have an outside relationship [with a financial institution], they’re choosing that relationship to make the payment. It shouldn’t have anything to do with me.” •
Retailers’ surcharge gambit a game of chicken
For years, merchants absorbed the cost of accepting Interac debit payments from customers. But an increasing number of fast-food outlets in shopping centres and other low-volume merchants now charge an extra $0.25 or require a minimum purchase from customers who use Interac.
According to Caroline Hubberstey, Interac’s director of public affairs, such surcharging remains rare but is becoming more common as retailers look for ways to mitigate the rising costs of doing business.
She noted that most retailers have resisted applying surcharges.
Merchants that depend on customers who pay by credit card, however, will face a high-stakes game of chicken with their competition over who will surcharge first.
Linda Bustos, director of e-commerce research at Vancouver’s Elastic Path Software, warned that any surcharge at the point of sale creates the kind of friction that turns customers away.
She said customers in-store and online loathe surprises when they check out, and they don’t like paying extra for using debit or credit cards – “especially after all these years we’ve been using them without having to pay for the privilege.”
If given the option to surcharge, Bustos said retailers should accept credit cards as a business expense rather than apply a surcharge, which often requires disclosure at the point of sale. She said studies have shown that customers believe they’re entitled to basic business services and are willing to pay more for products when services like free shipping are included.
Bustos cited one report that found customers were willing to pay $79.95 for an item that came with free shipping rather than pay $69.95, a price that included an additional $6.99 shipping charge tacked on at the point of sale. “People will be slow to accept [surcharges] as a normal part of shopping life and will be resistant to it.” •
