Credit Card Fees: Too Much or Just Right?

There have been multiple postings on this blog on credit card companies and different issues associated with them.  In the following article (http://www.nytimes.com/2008/11/06/business/smallbusiness/06sbiz.html?pagewanted=1&_r=2&adxnnl=1&ref=yourmoney&adxnnlx=1226272233-xQWPVgX2mC1qkoUxwQXDZg), another issue is addressed and this is the issue of fees associated with the use of credit cards that merchants must pay for every customer use.  In this day and age, people have become accustomed to using plastic as their preferred mode of payment for purchases.  The fees Merchants must pay every time a customer uses a card at their store are substantial.  This does not so much hurt big box retailers, but it can be detrimental for small business owners. 

There are numerous fees that a merchant must pay when a customer uses a credit card:  an interchange fee (which includes an average 1.7 percent of the sale price) and a flat per-transaction fee, and a separate fee that goes to the merchant’s bank.  And the fees don’t end there.  Each interchange fee is unique.  If the magnetic strip on a consumer’s credit card does not work and the cashier has to enter the card number in manually, a higher charge results.  Or if the card has “rewards” associated with it (i.e. cash back to the consumer or airline miles), that too has a higher charge.  Merchants are lobbying for legislation that would force banks to negotiate fees with them.  Merchants are also calling for regulation in the industry and some form of “Bill of Rights” for merchants.  Right now, merchants have no form of protection against credit card companies and credit card companies can basically levy any kind of fees on merchants that they want.   Merchants have tried a form of fighting back:  those who take cards are supposed to accept them for purchases of any size.  But to protect themselves from customers who use credit cards for everything, some small merchants break credit card agreement policy and set minimum amounts for card purchases. 

The credit card companies allege that merchants derive significant gain from the electronic payments system and that merchants benefit from rewards programs because those types of programs incentivize people to buy more when they use their cards.  And the higher fees associated with rewards cards are justified, say the credit card companies, because merchants and consumers both share in their expense (apparently merchants are supposed to pass the higher fees on to customers in the form of higher prices).    Advocates for the credit card companies allege that the uproar over fees is “a dramatic proposal by big retailers to use political muscle to lower their costs” and that “smaller retailers are being put up as poster children to show how challenging it is for them”.  But in reality, the big box retailers see this as an opportunity to lower their costs. 

In reality, I think it does not matter who would benefit from the lowering of fees: big or small retailers.  There should be some form of protection for these merchants against the seemingly unlimited fees that can be levied on them.  I believe the credit card companies are double dipping:  they get fees from the merchants who allow customers to use their cards at a particular store and they also get interest payments from customers who do not pay their bills in full each month.  Shouldn’t the credit card companies pay the merchant to be allowed to be accepted at that particular store?  It seems to me the credit companies have an absolute power right now, with almost no controls. 

November 9, 2008