Swiped away: Card transactions cost businesses
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LAKE COUNTY — Debit and credit cards offer convenience for customers, but local business owners say accepting the form of payment can gobble up profits.
Every time a person swipes a card part of the purchase price that could filter back into the local economy instead is siphoned off to card companies, most commonly the mega-conglomerates Mastercard and VISA.
Last year, swipe fees, also known as interchange fees, cost the Charlo Grocery $11,000. By changing processors it looks like the store will be able to save about $1,600 this year, according to owner Rick Marcure.
The store placed a $5 minimum mandatory purchase requirement on cards to help curtail the costs. Sometimes it’s difficult for busloads of school kids that stop on activity trips to understand why they can’t use a prepaid card to buy a 99 cent pop or bag of peanuts, Marcure said. By the time the store pays for the fees attached to the purchase, those types of sales would add up to a loss for the business.
“I might as well let them rob the store,” Marcure said.
Not offering the cards can mean losing out on business, however.
After 96 years of business, the Entertainer Theater in Ronan began accepting credit and debit cards last summer.
“I told them we have to do this,” Manager Rob McGreevey said. “Especially for the out of town or out of state people. They don’t have cash. They just have their debit card.”
Almost half of the theater’s customers pay with cash, and the number of people paying by check has dwindled drastically.
“We’re becoming a non-cash society,” McGreevey said.
Amy Miller, owner of the Malt Shop in St. Ignatius also said about half of her patrons use credit or debit cards, which she began accepting about a decade ago.
“It got so every other person was wanting to use a credit card, so you can’t do without it,” Miller said.
The fees are one of the top 10 business expenses for grocery stores in the Moody’s Markets chain, which operates Super 1 Foods in Polson and Harvest Foods in Ronan. CEO and president for the company Greg Hertz said almost half of all customers use a debit or credit card, but he doesn’t think many of those people realize what the associated fees mean for retailers.
A grocery store usually has a profit margin of 1.9 percent to 3 percent. Debit cards usually charge a flat 25 to 40 cent fee per transaction, but fees for processing credit cards charge that fee plus a 2 percent to 2.5 percent of the total purchase price to retailers.
Some companies now offer cash back rewards for certain cards that cost retailers an additional 1 to 2 percent. That led Moody’s Market to stop accepting certain cards, Hertz said.
“We’ve had a lot of customers complain,” Hertz said.
Hertz often asks customers if they realize who pays for the rewards program.
“It’s not Discover,” Hertz said. “It’s me. I can’t afford to take that card anymore because I can’t afford that transaction.”
Hertz, who is a Republican representative in the state legislature, said he doesn’t usually favor government regulation, but in this case he thinks more rules would be beneficial for small businesses because two major card companies have a monopoly on the card market.
Thousands of merchants sued Visa and MasterCard in a 2005 class action lawsuit for alleged price-fixing of interchange fees. A judge approved a $5.9 billion settlement of the suit in December 2013 that allows merchants to pass the fees along to customers in a surcharge. This is currently forbidden by the card companies. A similar class action suit against American Express was also announced in December.
“For the first time, merchants will be empowered to expose hidden bank fees to their customers, educate them about those fees and use that information to influence their customers’ choices of payment methods,” U.S. Federal District Judge John Gleeson wrote in his ruling.
Major retailers rebuffed that argument and pledged to appeal the decision because they argue it is not fair to customers and does not resolve the possible anti-trust matters at the heart of the matter.
“The proposed settlement would not structurally change the broken market or prohibit credit card networks from continually increasing hidden swipe fees, which already cost consumers tens of billions of dollars each year,” Walmart said in a web statement.
The National Association for Convenience & Fuel Retailing is an international trade association that represents 2,200 retail and 1,600 supplier companies. Forty-seven of the nation’s top 50 convenience store companies in the United States are members.
The association’s chairman, Tom Robinson, wrote on the organization’s website that it was not in favor of the settlement.
“Not only does the proposed settlement fail to introduce competition and transparency into a clearly broken market, it actually provides Visa and MasterCard with the tools to continue to shield swipe fees from market forces,” Robinson wrote.
The association claims the swipe fees are the biggest problem for retailers nationwide. For the first time in 2006, convenience stores paid more to credit card companies for processing fees than they made in profit. By 2012, industry profits of $7.2 billion were dwarfed by the $11.3 billion paid for processing.
In 2009 and 2010, convenience stores collected 5.4 million signatures that asked Congress to regulate swipe fees. The Durbin Amendment was passed with the Wall Street Reform and Consumer Protection Act on July 10, 2010. The legislation directs the Federal Reserve to regulate debit interchange fees so they are “reasonable and proportional.”
The final rules issued by the Federal Reserve limited interchange charges to 21 cents per transaction, plus one cent for fraud prevention and 0.05 percent of the transaction to cover fraud losses. The association appealed these rules, because the charges were far higher than originally proposed. A judge approved the appeal in July 2013, but the Federal Reserve issued a counter-appeal that is expected to be heard in 2014.
As retailers and business owners feel the crunch of the costs and await relief, Hertz points to other nations that have successfully regulated swipe fees as examples.
The European Union has aggressively reformed credit card fees so that they are less than one percent of transaction cost. According to a 2013 report by the Federal Reserve Bank of Kansas City that examined swipe rates of industrialized nations, only Cyprus and Greece have fees higher than those in the United States.
