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Credit Card processing - the rules are changing
Author: Jeremy Herring
October 1st 2012 -

No doubt you’re aware that a major class action settlement has been reached between retailers and Visa/MasterCard and you may also know that several major claimants in the case have not only rejected the settlement but have used their position to encourage other retailers to follow suit. What this all boils down to is the contention that Visa and MasterCard colluded to keep interchange rates artificially high and therefore profited in the neighborhood of billions of dollars at the expense of retailers. The settlement offers billions in refunds to the retailers involved in the suit plus a period of lowered rates for all retailers but no assurance of continued low rates after the specified grace period – meaning that the status quo was essentially maintained and there’s no protection that the same price fixing game won’t pick right back up where it left off. For this reason large retailers and retail trade organizations from Wal-Mart and Target to the National Association of Convenience Stores and National Grocers Association have rejected the settlement that they see as a payoff for letting the payment card industry continue to operate without adequate retailer protections.

The one added provision which came out of all of this isn’t even a legal protection so much as it is simply a corporate concession by Visa and MasterCard. Prior to this case, both networks strictly prohibited merchants from charging consumers for payment by credit or debit card. The intention was simply to make plastic as convenient and cost effective for consumers as cash. With no way to recoup the costs associated with payment card processing, merchants were expected to absorb anywhere from 2-6% of the sale price as an operating expense. The concession which came out of the settlement is to allow merchants to recoup the swipe fee in the form of a fixed added charge on credit and debit card transactions. Of course this naturally deters consumers from using the form of payment and it can also negatively impact a merchant’s business in highly competitive industries where lowest price could be their most valuable competitive advantage. So the concession almost sounds like a non-starter for many merchants.

It is interesting to note that Discover and American Express never forbid this practice; rather, they only stipulated that there be a ‘level playing field’ to avoid select cardholders being penalized but not others. Therefore as long as Visa and MasterCard embraced their policy preventing the swipe fee recollection it was also verboten to do the same for Discover and AmEx.

What does this mean for me?

Simply put, just because you can now tap your customers with a fee for paying by credit card doesn't mean it is a good idea. Competitive disadvantage and customer retention are just the most obvious concerns. The actual mechanism of the concession is also clunky. The amount which is allowed to be charged to the credit card paying customer is the swipe fee but not the interchange rate. Swipe fees are pretty consistent but the interchange rate is a percentage of the transaction amount. Therefore small ticket sales will fare worse than larger ticket sales. The fees are also not consistent across the different payment networks, making a workable solution complicated and cumbersome as well as indecipherable for consumers to understand why the fees change according to the card type.

There are also 10 U.S. states which already have laws in place which specifically forbid the type of credit card surcharges now permitted so merchants in those states are still out of luck even if they did want to attempt to recoup these fees. These states are California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas.

Looking Ahead

Ironically, this episode may be just the sort of catalyst which prompts merchants to begin embracing emerging payment technologies on a large scale. PayPal and Google Wallet technologies are poised to challenge the legacy card networks for cashless payment processing supremacy and the only obstacle has been retailers’ reluctance to invest in the technology upgrades necessary to accept contactless NFC payment devices. PayPal and Google are much more likely to offer cutthroat processing rates which can allow them to undercut the card networks’ rates while at the same time framing the legacy networks as antiquated relics relative to today’s technology savvy consumer.

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