Several weeks ago convenience store operator 7-Eleven submitted a petition to Congress to protest the fees that credit card companies charge retailers each and every time a customer uses credit instead of cash to purchase its goods. These are known in the industry as interchange fees and according to a recent Wall Street Journal article, amounted to 1.82% of every transaction made in the U.S. in 2008.
The article also detailed that this meant $45.3 billion in additional fees for U.S. banks, 75% of which stemmed from them using the Visa and MasterCard brand names. American Express charges even higher interchange fees given it serves a higher-brow client base that many merchants like to cater to. And apparently Diner’s Club charged rates as high as 7% for the privilege of accessing its privileged members when its cards first came out on the market.
The year-over-year increase in banking fees garnered was 78% and is serving as ammo for 7-Eleven and other like-minded retailers to claim the fees are getting out of hand. Not surprisingly, the industry has countered that the average interchange fee has actually decreased in recent years and was closer to 2% back in 2005.
What Exactly is an Interchange Fee?
An interchange fee is the amount that credit (and debit) card companies charge businesses and represents a cost for accessing its vast system of cardholders and payment network that executes the transaction, starting from the store charge and ending when it shows up on the client’s statement as is paid off. Banks also earn hefty interest from consumers that rack up credit card debt and is not a cost born by merchants.
Letting banks and other credit card issuers take on credit risk (risk of nonpayment) is a definite perk for retailers, the majority of which don’t offer in house credit programs themselves. It also makes payment much easier for consumers and allows them more flexible payment options (e.g. pay off the balance with one payment at the end of the month, pay it off over time with credit, or pay-as-you-go with a debit card). Another key perk is a points program that allows a card holder to receive 1% of all purchases back in the form of points that can be used to buy plane tickets, other merchandise, etc.
The Merchant Foots the Bill
The benefits offer sweet deals for credit card companies and consumers but it is merchants that must foot the bill. The fees also loom large for many retailers as they already operate with razor-thin profit margins. For instance, many mom-and-pop gas stations lacking 7-Eleven’s purchasing clout have gone out of business in the past couple of years on the combination of credit card fees and gasoline profit margins that evaporated along with record-high oil prices.
The Bottom Line
The good news for merchants is that current industry sentiment favors taking a closer look at interchange fees. Europe and Australia already regulate these fees to keep them between 0.3% and 0.4%. They are unlikely to fall this low any time soon in the U.S., but the downward pressure on interchange fees isn’t going away any time soon.