Credit card transaction fees increase: Businesses hit with 8 percent processing fee increase on Visa, MasterCard purchases

by Eric Olson

SBJ Reporter

eolson@sbj.net

Springfield merchants may not know it yet, but they're paying more each time a customer pays them with a credit card.

Bank processing fees charged to merchants that accept credit card payments are increasing 8 percent on average this year, according to David Pollock, director of merchant services for Great Southern Bank.

In banker's terms, credit card transaction fees are up anywhere from eight basis points to 15 basis points over last year a sizable jump from the typical historic increases of one basis point annually, Pollock said.

Pollack said that a business with $100,000 a month in credit card charges would see an increase of $150 in service fees. For example, Pollack said the fees charged to the store would increase from about $1,650 a month to $1,800 a month.

"That's doesn't sound like much, but it does amount to it after a while. That could be enough to kill a small business," said Donna O'Connell, owner of O'Connell's Center City Grocery. " There's all the expenses that go into that stuff. People don't realize that. I've educated a lot of them on the credit card thing. They were like, What do you mean it costs?' It costs a quarter every time I run that thing."

O'Connell has limited the use of credit cards to purchases over $2.

Nationwide, Pollock said, there are several billion transactionseach month.

To put the increase in perspective, Pollock said, this increase equals or surpasses the entire increase in the last 10 years. "Now in one fell swoop, it's gone up a whole bunch," Pollock said. "It's a whole different ballgame now."

The lawsuit

Retail experts say the rate game started last spring when Visa and MasterCard settled a $3 billion lawsuit filed by National Retail Federation, an industry watchdog group in Washington, D.C., and approximately 20 of the country's largest businesses, including Wal-Mart and Sears.

The groups sued over Visa and MasterCard debit card practices that charged merchants significantly different amounts for signature transactions (a percentage) versus PIN transactions (a flat fee). The suit also claimed antitrust law violations based on Visa and MasterCard "honor-all-cards" rules that if merchants accepted their credit cards they also must also accept their debit cards.

"What we have seen since then is that Visa and MasterCard have each increased interchange rates for credit cards twice," said J. Craig Shearman, National Retail Federation vice president, government affairspublic relations.

Visa and MasterCard set the rates charged to merchants accepting their cards, and banks that process the store transactions mark up those interchange rates.

"The implication would be that (Visa and MasterCard) are trying to recover some of the revenue they've lost because of having to lower prices on debit cards," Shearman added.

Shearman said Visa and MasterCard leveled the playing field on its debit card transaction fees by charging a flat fee of 10 cents or 15 cents for both PIN and signature transactions. Previously, merchants paid close to the same rates for signature-based debit payments as they did for credit card transactions, typically in the 1.5 percent range. The suit also provided retailers with negotiation rights to determine debit card fees, Shearman said.

Rate wars

Hammer's Autoworks co-owner Perrie Stone received a letter from Bank of America in February announcing its increase. Effective April 1, credit card transactions at the auto body shop would cost the owners 1.93 percent of the total charge, up from 1.82 percent.

"Not really a significant increase, just enough to tick you off," Stone said.

Credit card transaction fees top $400 some months at Hammer's Autoworks. "They're going to get a bigger chunk of that," Stone said.

National Retail Federation officials wonder when the rate increases will stop.

"What we're concerned about is how far (Visa and MasterCard) intend to go with this," Shearman said. "There seems to be somewhat of a competition going on where each card wants to offer a higher interchange rate because those are the rates they pay to the banks. That makes the card more profitable to the banks and makes a bank want to issue one card over another."

In the short term, merchants are expected to foot the bill, with the larger national retailers carrying the greater burden based on sheer volume.

"The merchants are the ones that are going to have to pay the piper for this lawsuit last year," Pollock said, adding that Great Southern Bank's merchant service clients which are in the thousands will likely see an increase to about 1.7 percent.

Shearman believes higher costs could trickle down to consumers.

"Retailers will absorb the increases and take the hit to a certain extent, but as they build up it has to get passed on. Ultimately, it gets passed on to the consumer," Shearman said.

"This rate war can't go on forever," Shearman said, "because it's going to hit a point where retailers simply won't be able to afford the interchange rates. If it keeps going up and up and up, retailers might not want to accept the Visa or MasterCard credit card, they might go back to only accepting their own store-brand cards."