Wal-Mart Among Retailers Taking On Credit Card Companies

By this time we should all be aware of the controversies surrounding credit companies - in addition to increasingly complex and confusing options for credit applicants, credit card issuers have been raising interest rates and fees for many current borrowers, many of whom were in complete compliance with their card holders’ agreements when their rates were raised. This is a major reason behind the call for continuing credit card reform.

What many people might not be aware of is the struggle between credit companies and the retailers at which their cards are used. As Bloomberg explains, this could end in a giant Visa vs. Wal-Mart rumble:

Lawmakers are promising new rules to bring down the interchange fee, a charge on purchases sometimes topping 3 percent that’s split by the two banks serving the customer and merchant. Supporters of the legislation include the biggest retail chains, restaurants and small businesses, which say the fees erode profit and inflate prices...Interchange is the second-biggest cost after payroll, Target said, and merchants want to negotiate lower payments collectively without running afoul of antitrust law.

The issue has become such a hot topic, the Government Accountability Office has been ordered to study the effect interchange fees have on both consumers and merchants. The “interchange fee” is the fraction of every credit card transaction that the card’s issuer retains. When combined with additional smaller fees levied by a retailer’s own bank (to which the retailer first submits the transaction), interchange fees can cut into retailer revenue - especially important for those retailers with slim profit margins.

Interchange fees have risen over time - interesting, since technological advances would suggest the cost of such transactions should go down - and the result is a growing battle between retailers and card issuers. Wikipedia provides a surprisingly simple example of how the fees work:

For one example of how interchange functions, imagine a consumer making a $100 purchase with a credit card. For that $100 item, the retailer would get approximately $98. The remaining $2, known as the merchant discount and fees, gets divided up. About $1.75 would go to the card issuing bank (defined as interchange), $0.18 would go to Visa or MasterCard association (defined as assessments), and the remaining $0.07 would go to the retailer’s merchant account provider. If a credit card displays a Visa logo, Visa will get the $0.18, likewise with MasterCard.

Keep in mind that, according to Bloomberg, MasterCard and Visa process about 58 billion transactions annually. So that $.18 per $100 will add up over time. Retailers argue the current system needs an overhaul, and so the real question might be what effect changing the current system would have on consumers. Retailers allege that interchange fees in the U.S. far exceed those charged outside the United States, and are out of line with falling technology costs as well. The result - higher prices, lower profits and harm to the consumer. On the other side of the coin, credit companies and groups like the Electronic Payments Coalition have taken a different stance:

“Merchants don’t want to pay their share of the interchange system and they want consumers to pay it instead,” said Trish Wexler, spokeswoman for the Washington-based Coalition.

Its always helpful when each side claims the others’ position will harm consumers, isn’t it? Again, as we mentioned, the Government Accountability Office is slated to conduct a study of interchange per the request of the Obama Administration. That report is scheduled to be presented in six months. Meanwhile on the Hill, Congress has introduced the Credit Card Fair Fee Act, which would let merchants bargain together on interchange rates and designates the Department of Justice as arbiter.

Posted by Corey Himrod on Thursday, June 18, 2009

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