Merchants are finally standing up to credit card brands.
The thing is everything effects the merchants. The question is: will they affect merchants in a positive way? Merchants truly are the cog that makes the whole system go around and yet they are wholly at the mercy of the system. No one cares what they want and merchants are literally just told what they can and can’t to do and expected to deal with it.
Visa, MasterCard and the other card brands want their customers to use their cards for all of their purchases so they offer rewards and incentives, such as cash back and airline miles. Customers want to use their cards for all of their purchases so they can earn all of that cash back and miles.
But somebody’s got to pay for all of those rewards and that makes the rates for accepting those cards a lot more expensive, a burden the merchant gets to bear.
The rules set by the card brands, Visa/MasterCard and the like, state that if a merchant is going to accept Visa (for instance) then they must accept all Visa cards regardless of type. These acceptance rules are written into every major card brands Terms of Agreement and are basically a signed contract when a merchant agrees to accept credit cards. This means that even though the expense is much higher for the merchant to accept these premium card types they still have to accept those cards anyway and deal with it.
The problem for merchants though, is that people love their rewards cards. Consumers strategize which cash back or airline miles card will get them the most bang for their buck so to speak. In fact, rewards earning credit cards account for 92% of all credit card purchases. Which in turn translated to about $43.4 Billion in swipe fees going straight to the credit card providers last year.
Somebody has to cover the expense of giving these bonuses to the consumer and it’s not the card brands, it’s the merchants. These premium or rewards cards come with a higher interchange fee rate than the more conservative lower tiered cards. Rewards cards can cost a merchant anywhere from 2.1% – 2.7% and corporate rewards cards can exceed 3%, a significant increase over the 1.2%-1.7% for a regular everyday credit card. And the more and more popular premium rewards cards become the more it dips into the merchants bottom line. Deal with it.
But, last month a group of large retailers decided to take steps towards fighting back. Target, Home depot, Amazon are among a group of large retailers who are fighting the card brands to be able to decide for themselves if they want to accept a certain type of credit card or not.
Visa and MasterCard already settled a case for a $6.2 billion settlement where merchants accused them of fixing rates in favor of the bank, but this settlement does not provide for any meaningful change to the regulations or the card brands in the future. This coming of the heels of Visa’s fourth quarter reports showing an increase of 33% in profits over the same time last year, all while their income tax has gone down almost 28% from the same period last year. No wonder merchants are pissed.
Why do merchants want to be able to reject certain cards? Why are they not just adding a surcharge for the higher cost card?
Premium card holders tend to be individuals with more disposable income that merchants do not want to drive away by refusing their preferred form of payment. Most likely they are posturing in an effort to force credit card companies to lower the fees across the board. Visa and MasterCard won’t want to completely lose out on the sizable revenue they get from use of these cards by allowing major retailers the size of Target or Amazon the ability to reject these card types. It would be easier to actually lower the rates across the board instead. And it wouldn’t be the first time that has happened. Last year, American Express did exactly that when they decided to slash its fees after years of being labeled “the most expensive card to accept” in an effort to increase merchant acceptance.
Surcharging and Cash Discount Programs have long been a way to offset the costs for merchants accepting credit cards. The card brands don’t approve of merchants doing anything to deter “their” customers from using their credit card to make purchases so they keep trying to find ways to fight it. Governments have always been allowed to add a surcharge. Only merchants weren’t allowed to do it. Deal with it.
But they lost that fight last year when in a court case it was ruled that passing on the cost to the consumer is governed by the first amendment and ultimately gave all states the right to practice surcharging.
Surcharges cannot be applied to debit cards or gift cards. Debit cards are already much lower cost to process anyway, and patrons must be able to have a payment option that is no fee. Merchants must register with the card brands and there is a 30 waiting period and a cap at 4%.
As rewards card popularity increases so do the costs to merchants for having to accept them. Should merchants have to bear the brunt? Visa wants merchants to deal with it
Merchants often find the Cash Discount program easier to implement due to fewer regulations. It initially was an answer to the surcharge laws in those states that didn’t allow it, but it is also a way for merchants to effectively pass the fees on to the customers in a softer way. Studies have shown that people react more favorably to a discount then they do a charge and honestly a lot of consumers don’t really realize how much it costs for merchants to take their different cards. This isn’t to say that they don’t know it costs the merchant money to accept credit cards, it’s more that they don’t know how much more these rewards cards cost then other cards.
But Visa is trying to put the kibosh on that too. On Oct 18th Visa sent a bulletin to the acquiring banks informing them that Visa has decided that “this tactic is NOT compliant with the Visa Rules and may subject the acquirer to non-compliance action.”
This means they want to punish the big acquirers for non-compliance. You can see why. Even a slight decrease in the use of their cards is big hit to their bottom line. Visa’s main goal is to make sure merchants are not doing anything to deter consumers from using their card to make their purchases.
This could result in those acquirers contacting their merchants and shutting down these programs. If this happens to merchants who have been implementing these programs to offset their merchant service fees, they will find themselves having to foot the bill for these fees. Deal with it.
Let the big retailers stand up for all merchants rights.
Not accepting your patron’s preferred payment method is not a viable option for most businesses. But paying exorbitant fees isn’t either. Something has to give.
You have to wonder if this move is also an attempt to incentivize patrons to apply for and utilized these large retailers very own store cards instead of the mainstream card brands. Everyone of these larger retailers offer their own in house credit card. Target’s Red card, Amazon Prime Visa, even Home Depot offers its own in house card. Yes, they are also Visa Card Brand cards, but larger retailers such as these have been able to negotiate specific, lower, rates for their own in house cards. So you can see why it would be a benefit to stop accepting higher priced cards and entice consumers into applying for and using their in-house credit cards.
One thing for sure is that the larger retailers such as these have a larger voice and hold a lot more power than the SMBs of the country. The question will be- how will these movements ultimately affect those smaller and medium sized businesses across the country?
Earlier I stated that no one cares what merchants want. That couldn’t be further from the truth. We Care. At Bankcard Brokers we have always been supportive of our clients needs and strive to do everything we can to take some of the pain out of paying for their merchant services. We always promise to provide the most transparent, reliable, secure, and fair merchant services we possibly can to our clients. We also go to great lengths to keep up on the changing landscape of the payments industry and to educate our merchants on how it may affect them. For any questions please don’t hesitate to call. Our ETA Certified Payment Professionals are at the ready to help coach and guide you to the program that is best for you and the ongoing health and profitability of your business.