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Merchants deal with little-known costs of card transactions

August 2, 2009
By RODNEY MINOR, The Leader-Herald

Credit cards are convenient for consumers, but retailers say there is a hidden cost being paid with every swipe.

Merchants of all sizes, across the nation, are raising awareness of the interchange fee, which they say raises the cost of doing business. That, in turn, means higher prices for consumers.

Interchange fees, generated whenever a customer uses a credit or debit card, are typically between 1.2 and 2.2 percent per transaction, according to Card & Payments, a monthly industry publication based in Skokie, Ill. The fee - which averages about 2 percent and is paid by the retailer on a monthly basis -is based on a variety of factors, including the type of card used, the amount of the transaction, and the retailer's contract with a company that processes the fees.

Article Photos

The Leader-Herald/Bill Trojan

Marc Hughes, the owner of Midtown Discount Beverage in Johnstown, runs a credit card for a customer Tuesday.

Marc Hughes of Midtown Discount Beverage in Johnstown said his fee is about 2 percent. Depending on the profit margin of an item, that can cut the profit by about 14 percent 25 percent.

"The bottom line is some customers do not have cash on them," he said. "If I don't take the card, they don't have the option to buy [items.]"

The convenience store chain 7-Eleven started circulating a petition in July to give small businesses more power to negotiate the fees. The company is hoping to generate support for legislation that would establish a negotiating process for determining the interchange fees. The corporation noted it paid $160 million in bank card fees last year, up from $40 million five years ago.

Tom Mailey, a spokesman for Stewart's Shops, said most of its stores credit card sales involve gasoline. The total fees for credit card sales it paid last year came to $8.5 million. Mailey said those fees have steadily increased over the last several years.

"Credit card fees in general are a concern for us," he said.

According to the National Association of Convenience Stores Web site, fees among convenience stores reached $8.4 billion in 2008. The amount was up 10.5 percent from 2007, and nearly three times the level from five years ago.

Interchange fees generated by bank cards totaled $23.99 billion in revenue last year, according to Card & Payment. That accounted for about 19 percent of the revenue from bank cards.

However, the American Bankers Association notes that interchange fees have remained relatively constant in recent years.

What's new is that more people are using credit and debit cards to pay - a development that has led to higher sales and profits for merchants, according to the ABA.

According to 7-Eleven, the fees are becoming more burdensome to small businesses as people increasingly use plastic to pay for even minor purchases. The company said the average purchase at one of its stores totals just $6.

The Electronic Payments Coalition is a national group that represents credit card companies and banks. According to its Web site, interchange fees are a cost of doing business, just like postage expenses. Banks and credit unions that issue cards use the interchange revenue to help cover write-offs that occur when customers cannot pay their bills.

"Merchants that choose to accept debit and credit receive significant benefits for doing so - and they pay a few pennies on the dollar for these benefits," the EPC Web site said.

Amy Lanzi, an owner of the Chatterbox Boutique in Amsterdam, said being able to accept cards is very convenient for customers and a necessary part of doing business. However, many people do not realize the true cost of the transaction.

"I don't think most customers realize the merchant is paying for it," she said.

According to the EPC, businesses can shop around and negotiate for the best possible rates and terms for accepting credit and debit cards from processors.

While card companies such as Visa and MasterCard set the fees, the revenue is distributed to multiple entities, including the merchant's bank and the issuing bank - with the latter getting the bulk of the fees, said Kate Fitzgerald, associate editor at Cards & Payments.

The ''brutal competition'' between Visa and Mastercard for bank business makes it difficult for either to lower interchange fees, she said.

Hughes said it is true that merchants can shop around. He routinely gets calls from processors offering a variety of fee rates.

However, he said, even if a better rate is available, it's so small it is not even worth the headache of filling out the paperwork to change processors. The current company Hughes uses has worked with him for years and treated him well, he said.

"In my eyes, it is worth it to be faithful to my company," he said. "It's better for me to stay with the company that has treated me well than to fill out the paperwork to save .001 percent."

Mailey said that it's important to remember where these fees end up.

"As banks raise their fees, some get passed along to customers," he said.

Information from the Associated Press was used in this story



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