Small Merchants Attempt to Hold Down Interchange Fees

Some small business owners shared their suggestions for minimizing credit card interchange fees, after yesterday’s hearing on a bill to restrict some fees and increase transparency. (Interchange fees are what merchants pay to the bank when customers pay with swipe cards, on average about 1.75% of each transaction.)

A reader named Suzanne Riga writes about giving discounts for cash:

We discount 3% for cash sales to try to recover the cost on credit cards. The problem we’ve run into now is more customers use debit cards than cash. Debit cards are considered a “cash transaction” so we really get hit hardon those charges. We are debating now whether to consider not giving a discount on a debit card. That would antagonize the customers though, so we’re caught in a catch 22.

Monte Smith says his restaurant recently started passing the cost of interchange along to customers:

Credit card payments are 48% of our payments. So you add all the fees it gets to be expensive. It seems that these card companies twice a year raise their rates and if a restaurnt raises it menu they get another raise based on their percentages….We just started calulating the cost of these fees [to] be included in menu pricing..

And J. Goldberg set a $20 minimum on taking credit cards, even though he says it breaks the rules of his agreement:

Recently in my small business I did an average cost per ticket anaylsis of my credit card transactions instead of trying to figure out the 40 page bill. What i found out is that it costs me $2.12 average for each transaction. I did 1100 transaction in July and it cost, with all of the fees open and hidden, $2332. Even though it is against the rules we have instituted a $20 minimum on the acceptance of credit or dedit cards.

Meanwhile, a spokesman from Visa got in touch with me yesterday to send over the network’s statement. Here are some excerpts:

Merchants receive tremendous benefits from electronic payments including guaranteed payment, increased sales, faster checkout times, as well as greater convenience and security - all at a fair price. For these benefits, Visa’s interchange rate for banks averages 1.62 percent for each transaction and has remained steady for a decade. Unfortunately H.R. 2382 is nothing more than a renewed effort by lobbyists representing some national retailers and trade associations to shift the normal cost of business onto consumers, while retailers continue to reap the benefits electronic payments offer and pad their profits.

Importantly, retailers already have numerous options to manage their acceptance costs. They can shop around and get a better deal on their merchant acquirer, negotiate a lower fee with their acquiring bank, steer consumers towards other forms of payments and offer discounts for cash, check or PIN debit.

Now, that may raise some eyebrows among merchants. Has anyone tried to negotiate lower fees with their bank? Share your story with us in comments below.

Here are some changes that the Credit Card Interchange Fees Act of 2009 would make:

  • Ban the practice of charging higher fees to the merchant when customers pay with “rewards” cards
  • Prevent credit card networks from imposing certain restrictions on merchants, like how they can display their prices or steering customers to use cash instead.
  • Increase transparency for merchants and direct the FTC to police merchant agreements for unfair, deceptive, or anti-competitive practices

The big concern here is whether the market is working to set interchange fees in a way that reflects the value that credit cards provide to merchants and consumers. A great nugget from this US News piece suggests the opposite might be happening. Quoting payments expert Aneace Haddad:

“Interchange fees are set by Visa, MasterCard, and other card schemes as a feature of each card product that the scheme offers to banks,” explains Aneace Haddad, an entrepreneur who works in electronic payments and blogs on the subject. “When a bank is deciding between a Visa or MasterCard logo on their cards, and between one company’s platinum card and the other’s, it is very tempting to choose the one that provides the highest interchange fees. This competition is what has driven interchange fees higher over the years.”

In other words, competition from bank card issuers drives the prices up, rather than competition from merchants and consumers driving the prices down. Sound like a functioning market?

Please keep the comments coming on this one. It’s a bit of an obscure topic, but one that matters to almost anyone doing business, particularly any consumer-facing business or anyone selling online. So your on-the-ground stories are invaluable to reporting on this.

Before it's here, it's on the Bloomberg Terminal.