Credit Card Fees: Convenience can cost

Since credit card use began approximately half a century ago, consumers have been drawn to the convenience they provide. Today, most businesses accept credit and debit cards not only due to customer demand, but also to boost their sales by offering diverse payment options. However, the fees associated with accepting credit and debit cards – which can be as high as four percent of the total sale for a single transaction – can cut into those profits. As a business owner/operator, it is critical that you identify and understand all of the fees and surcharges in your processing statements to begin controlling them and saving money.

Interchange Fees and the Dodd-Frank Act. One of the most hotly-debated fees, especially in recent months, is interchange fees, also known as “swipe” fees. Interchange fees are a percentage of each transaction amount imposed by the card brands (Visa, MasterCard and Discover Network*; American Express follows a different pricing model) that the issuing banks collect from retailers every time a customer uses his/her credit or debit card. Currently, interchange fees can range anywhere between 1.5 to 2.5 percent for each card-based purchase. 

According to the National Retail Federation (NRF), in 2008, U.S. retailers and consumers paid an estimated $48 billion for interchange – three times the $16 billion charged when the NRF began tracking the fee in 2001. These fees – and others – sometimes put small businesses in the difficult situation of choosing between profit and customer convenience.

In July, the U.S. Congress passed, and President Obama signed, the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as the financial reform bill. This 2,300-page landmark legislation contains a number of provisions affecting Wall Street, lenders, banks, mortgage underwriters and hedge funds – among many others. Most important to business owners and retailers, however, are the impact of debit interchange reform and the issue of “swipe” fees.

How Does the Debit Interchange Reform Affect You? The new law directs the Federal Reserve Board to ensure that debit-swipe fees are “reasonable and proportional” to the cost of processing transactions. The Federal Reserve has nine months to write the new regulations which will then most likely take effect July 2011.  It is important to note that these changes only affect debit cards issued by the nation’s largest banks. Some industry experts believe debit interchange reform may be the first step in regulating credit card interchange as well.

The Reform does not directly impact credit card rates, except that business owners can immediately establish a minimum dollar value for accepting credit cards. The minimum may not exceed $10 and applies to credit cards only, not PIN or signature (non-PIN) debit or prepaid cards. If you plan to post a minimum purchase sign, it must state, for example, “Credit card sales require a $5.00 minimum purchase.”  Additionally, you will not be penalized by the card brands for offering in-kind incentives and discounts to customers who use debit cards, checks and cash, but you will, according to state laws, be required to disclose those discounts to customers.

The Benefits of Interchange Fee Reform Can Depend on Your Card Processing Agreement. While several groups representing retailers have long been lobbying for interchange fee legislation to help lower the costs associated with accepting credit and debit cards, many business owners will not actually reap the potential benefits and cost savings from the legislation unless they are on a certain pricing model with their credit card processor, called “interchange-plus.” This is a transparent, simplified model that passes the interchange fees directly through to the merchant while also divulging the separate fee the processor charges for its processing services.  However, most businesses across the country, especially smaller ones, are on tiered pricing or discount rate models that group together interchange fees and the processor’s fees, which will make it hard for processors to separate the fees and pass down the reduced interchange rates and savings to businesses. 

For example, in 2003, in the aftermath of the Walmart lawsuit against Visa and MasterCard – which helped reduce debit interchange by a third toward the end of 2003 – most card processors did not pass the cost savings to their merchant customers because many were on discount rate pricing models. Instead, most processors kept the cost savings and increased their own bottom lines.

Since many independent garden center retailers may be priced this way, the two most important questions you should ask your card processor are, “What is my pricing structure for accepting credit and debit cards?” and “How can I be sure I will benefit from the new debit interchange bill and see some cost reductions as a result?” Don’t accept anything less than a detailed answer that outlines exactly how your processor plans to ensure you receive the appropriate cost savings. 

Understanding the Complexity of Card Processing. Interpreting the statements you receive from your processor to ensure you are receiving reductions can be a challenge. However, learning more about how to read them will help you control what you are really paying. Fees for card processing services may be among the three highest expenses small businesses incur. You deserve to know what you are paying for, and why.

In addition to interchange fees, there are two other components of processing fees you, like every card-accepting merchant, must pay every month:

Dues and Assessment Fees: These are fees imposed by the card brands, and are charged on a per-transaction and percentage-of-volume basis. 

Processor Fees: These are the fees your card processor charges for authorizing and/or settling credit/debit/prepaid cards and routing money and data to complete transactions. Charges vary from processor to processor.

Are Hidden Fees Lurking in Your Processing Statement? Besides these standard fees, processors often charge hidden or “junk” fees, such as membership fees, access fees and compliance fees. These vague, deceptive fees are typically disguised behind cryptic codes, jargon and fine print in offers and contracts. Some also use the card brands’ seasonal interchange increases in April and October to their advantage by not disclosing the breakdown of costs, raising their prices while assigning the blame for the increase to the card brands.

Many processors also tend to quote a low rate just to make the initial sale and fail to point out that only a small percentage of transactions will ultimately qualify for the special rate, with the remainder being charged double or triple that low rate.

Since every processor approaches pricing differently, you should educate yourself so you know which questions to ask to ensure you’re getting a fair deal. A helpful tool to utilize is CostOfABurger.com, an educational site that offers a fictional monthly statement to use as a tutorial when reviewing yours.

Now, more than ever, independent retailers like you are looking for ways to cut costs to help boost your bottom line. By learning the facts about payments processing and knowing the right questions to ask, not only can you eliminate hidden fees and reduce your out-of-pocket expenses on every transaction, but you can also maximize the benefits of the recent debit-interchange bill.  These savings can then be put to toward more important things … like your business.


 

Tips for better understanding your statement

1. What types of cards are being used? Many processors list Visa® or MasterCard® in the card type column, designating the card company, but not the card type. By not identifying the card type, the processor charges more for lower-cost transactions, such as debit cards. Without knowing the card type, it is hard to decipher exact costs.
2. "Total card fees” don’t represent your total costs. Don’t rely only on the “total card fees” line item to determine your total cost. If your statement lists this amount, you will have to do some math to find out the total you are really paying. Add the “less discount paid” (the fee you pay your processor) to the “total card fees” (the interchange you pay) to arrive at your real bottom-line costs. 
3. “Discount rates” are misleading. “Discount rate” is an industry-accepted term for the fee your processor charges. However, many processors quote you a low “in-the-door” discount rate without disclosing that most transactions do not qualify for it. Look at your statement carefully, and you will likely see many transactions charged at much higher rates.
4. Beware of bill-backs and other surcharges. Many processors hide arbitrary fees, often classified as “bill-backs” and “surcharges,” without disclosing them. Some are billed the month the transaction occurs and others the following month, making reconciling charges and figuring out total monthly costs difficult.
5. Take note of additional fees.  From PCI security and per-transaction fees to batching, authorization, annual charges and more. Understand what these fees are and why you’re paying for them.
6. Don’t do it alone. Reviewing monthly statements can be overwhelming. Until you know what to look for, consider contacting your payments processor to help you. Ask your accountant or even another processor take a look. At no cost to you, some processors will walk you through your statement, help uncover hidden fees and show you where you can save money.

Try using this easy formula to determine what you are paying for each transaction:

• Step 1 – Add up your Visa and MasterCard fees. *
• Step 2 – Divide that number by your total Visa and MasterCard sales volume. *
• Step 3 – Multiply that number by 100.

The result is your true or “effective” rate. It includes the interchange fees you pay card brands, as well as the fees you pay your payments processor. Odds are that your effective rate is higher than you think.

*American Express, Discover or PIN-based debit card transactions are not included in these calculations as they may be billed separately