Dangerous interchange

Credit card swipe fees threaten to undermine supermarket profits.

For consumers it may pay to Discover, but for retailers quite the opposite is true. While Discover Card and the other credit card companies are enticing consumers to ditch the cash with promotions like a 5% Cashback Bonus for using their credit card in a supermarket, the supermarket is hit with skyrocketing transaction fees.

The problem is especially acute for low-value transactions such as swiping plastic to buy a loaf of bread.

Also known as interchange or swipe fees, banks and credit card companies collect fees on each transaction where a customer uses a credit or debit card to make a purchase. Each time a customer swipes a credit or debit card at a grocery store, the store pays an interchange fee to their merchant acquirer/processor which then passes through the interchange fee revenue to the card issuing bank. In addition, the grocer pays network fees to the credit card company and processing fees to their merchant acquirer/processor that constitute the total cost of accepting the cards.

According to industry observers, the upping in the fees charged to retailers is an unintended result of the Durbin Amendment, which lowered fees for high value charges by capping the interchange fee at 22 cents instead of the 1.1% that issuers used to charge. Because the banks lost the revenue on high-value transactions, the 22-cent cap became the minimum rate.

“These transaction costs have been eating into profit at an increasing rate,” says Bill Bishop, chairman of Willard Bishop, a consulting firm based in Barrington, Ill. “Retailers have been focused on trying to reduce them.”

Nebo Djurdjevic, CEO of Amsterdam-based Cardis International, based in the firm’s Toronto office, says the fee on a low-value transaction is somewhere around 1.6%—plus a 4- or 5-cent handling fee. “At a $100 level, 1.6% is $1.60 and that four or five cents is completely irrelevant, but when you get down to a $5 transaction, 1.6% is not sufficient to cover the costs that the issuers have and that is why they want to have that per transaction fee.”

Unlike department, clothing and specialty stores, supermarkets operate on razor-thin margins. “The average profit of the industry is right around 1%,” says Jennifer Hatcher, senior vice president, government and  public affairs at the Food Marketing Institute, based in Arlington, Va. “We went back 60 years and never found a time where it was anything but around 1%.

“The small value transactions are even more challenging because of the interchange fees—there are literally pages and pages of them—MasterCard has 100 pages of different rates on their website,” Hatcher says. “The challenge for the small business owner is not only the rates, but knowing what rate they are supposed to pay, what is accurate or not when they get their bill and whether to challenge something or not.”

To remedy the situation, Hatcher says the industry has looked at legislation, negotiations with credit card companies and other approaches. “We did win a victory on the Hill, legislatively, on the Durbin amendment regarding debit fees, but it did not touch credit,” she says.

Cash discount
To remedy the situation, observers say retailers may opt to reward shoppers who pay with cash.

“Retailers are going to get creative in making sure that if you pay by cash you are going to get total value,” says Kumar Venkataraman, partner, consumer and retail practice, in the Chicago office of A.T. Kearney, a global management consulting firm. “It could be loyalty points. It could be value-added services. They are going to try and capture that difference through some other means, which will be mutually beneficial for consumers as well as the retailer,” he says. “This could be turned into a real opportunity. It all depends on how creative and innovative retailers are going to be in making use of this opportunity.”

Some retailers in Australia and New Zealand have started to charge a fee for using credit cards, but that is not sitting well with consumers, Djurdjevic says. “If that fee is there and is disproportionately high then the consumers refuse to pay and will either go elsewhere or pay in cash,” he says.

Hatcher says some supermarkets are already offering a discount on customers who purchase gasoline with cash and their loyalty cards. “The challenge in the supermarket environment on offering those discounts is the wide variety of products you are talking about discounting,” she says. “With gas you only have regular, premium and super that you are programming the system for and discounting. That makes it a much more clear transaction.”c

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