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Business Trends: Striking 'swipe fees'

Merchants look for relief from credit card transaction costs

Interchange fees are retailers' third-highest cost
    after labor and inventory.
By Joanne Friedrick
October 05, 2010

When President Obama signed financial reforms into law in July, one of the areas targeted were the fees associated with debit and credit card use.

Interchange fees - the fees credit card companies charge to process transactions that move from the customer's bank to the merchant's bank - amounted to $48 billion in 2008 for all retailers, says Dave Koenig, director of tax and profitability for the National Restaurant Association in Washington. Under the reform law, the Federal Reserve System's Board of Governors will enact regulations that ensure the interchange, or "swipe fee" imposed on card transactions are "reasonable and proportional" to the cost incurred in processing the transaction, he explains.

The fees represent 2 percent to 4 percent of a transaction's value, depending on how they are set with a particular retailer. Fees can vary by the card brand, size of transaction, type of transaction and size of the merchant.

For most retail and restaurant businesses, interchange fees are the third-highest cost behind labor and inventory. Todd Steele, owner of Metrovino, a Portland, Ore., restaurant specializing in New American cuisine, including smoked and cured seafood, calls the fees "my third highest-paid employee."

With 90 percent of sales coming from credit card-using customers, it isn't feasible for the restaurant to not accept them. Most card companies use third-party resellers to set up credit card transactions, he says, so fees can vary.

Steele negotiated the rates between 2 and 3 percent when he opened Metrovino 18 months ago. While Visa and MasterCard have similar rates, American Express is a bit higher, and even Discover has its own rate structure although they all use the same back-end technology, he says.

I nterchange fees were designed to cover the cost of processing the transaction among financial institutions and to build in funding for technology improvements. But as technology has made transactions easier, opponents of the fees claim the rates have risen disproportionately. The Merchants Payments Coalition (MPC), an organization working to change the fee structure, notes that the fees rose 117 percent between 2001 and 2006. American families pay about $300 a year in interchange fees that get passed along to them through higher prices for products and services, says the MPC. But because the fees aren't identified on credit card transactions, it's difficult for individuals to see the actual cost involved.

Steele points out that each credit card transaction has fees associated with it, so if a table of four diners each uses a card to pay, he is assessed fees on each of those payments. As a result, Steele now limits the number of cards per table to two. The information is posted on the menu, he says, but it still rankles some customers.

Under the new regulations, merchants will have the option to set a $10 minimum for card transactions, as well as to offer discounts to consumers who choose to pay with cash.

"Both of these provisions may lend themselves to less use of credit card payments by consumers at restaurants and other retail establishments," says the 
NRA's Koenig.

In addition to making sure to negotiate the fees, Steele says businesses should also be wary about unsolicited calls from companies wanting to handle credit card services.

Steele's experience in retailing and restaurants has helped him navigate the murky waters of interchange fees, but he would like to see the regulations go beyond what has been set up so far to include regulations on the freelance resellers and the setting of flat rates.

"Every time a card is swiped, a standard 15-cent or 25-cent fee would be nice. But there's so much money to be made off of it," he says, that it's unlikely that kind of change will come any time soon.


Contributing Editor Joanne Friedrick lives in Portland, Maine


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