Consumers finally got some relief from abusive credit card practices last week. Not so small businesses, who continue to pay fees they cannot negotiate and cannot elude if they want to remain in business.
Visa, MasterCard, and the banks that issue their cards take as much as 3 percent off the top of every transaction in the form of interchange fees. For retailers, restaurant owners and others squeezed by the recession, the fees turn the screws a little bit tighter.
And high fees can translate into a waiter not hired or equipment not replaced.
If a card is presented, the merchant must accept it, no matter how small the transaction.
Fred Horseman, owner of Next Door Espresso in downtown Spokane, says he once offered to give a 75-cent candy bar to a woman because the processing fee – 20 cents plus 1.64 percent of the sale – would eat up his profit, and then some. She insisted he take the card, and he did.
He has a sign on the counter asking people to use cash for any transactions less than $5. Most customers are good about honoring the request, even buying an additional item to clear the mark.
Refusing cards altogether is out of the question, he said. Customers present plastic for 15 percent to 20 percent of all transactions.
“Nobody carries cash anymore,” Horseman says.
Kevin Settles, owner of three Bardenay Restaurant and Distillery operations in Idaho, including Coeur d’Alene, pays more than $100,000 a year in fees, including the small fraction imposed for the privilege of collecting sales tax for the State of Idaho.
He does not know from month to month precisely when the charges will be made, or how much they will be.
“They just suck the money out of your bank account,” Settles says.
Settles was one of several Idaho business owners who went to Washington, D.C., earlier this month to explain their plight to the state’s congressional delegation, especially Senate Banking Committee member Mike Crapo. Their trip was coordinated by consumer and small-business groups asking lawmakers for shelter from the all-powerful card companies and banks.
Fees have tripled the last 10 years, to as much as $46 billion in 2008, according to a report commissioned by the National Retail Federation. Competition, which should drive fees down, instead has pushed them higher. Banks that issue the cards to consumers want the highest return possible, so Visa and MasterCard bid charges and fees up in order to get their business.
The arguments for and against controls are summed up in a Government Accountability Office report issued in November. The report was authorized in the same consumer-protection bill implemented last week.
Visa and MasterCard, with 82 percent of the market based on card balances, have extraordinary market power. By the same measure, the four biggest card issuers – JPMorgan Chase, Bank of America, Citi and American Express – control 62 percent of the market.
To fight against that concentration of power, the retailers are seeking a fee cap, the ability to form groups that can negotiate lower fees, and the freedom to steer customers toward lower-fee cards. Consumer groups want more disclosure: Visa and MasterCard had more than 300 interchange rate categories last year.
The banks argue that businesses that accept credit cards do more business, are assured of getting paid, and have better records.
Merchant appeals to Congress probably will not get far this year.
Rep. Barney Frank, D-Mass., chairman of the House Committee on Financial Services, told credit union officials Thursday that regulation of interchange fees is not on his agenda this year. In the Senate, the issue is entangled with Banking Committee deliberations over new oversight of the financial services industry.
With $46 billion on the table, the banks will not let the fees go without a fight. Besides, they say, merchants and restaurants will absorb any savings from fee caps. True enough, but consumers should be entitled to know how much they fork over to cover, for example, someone else’s credit card rewards program.
And better that a Next Door or Bardenay gets the extra income. There seems to be more than enough to go around on Wall Street.