It can sometimes feel like there is an invisible tug-of-war match going on between buyers and suppliers over payment card acceptance. While buyers want to use p-cards so they can save money on payment processing and improve cash flow, some vendors find that the costs of accepting cards outweigh the benefits.
A report published last month by the General Accounting Office sheds some light on why vendors may be reluctant to accept payment cards. The report, which was commissioned by Congress as part of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (typically abbreviated CARD), was a study of the impact interchange fees have on card-accepting merchants.
Interchange fees are paid by merchants to the cardholder’s issuing bank for each transaction they process. While vendors also pay a fee to the merchant bank for each transaction, interchange fees are significantly larger.
If a cardholder makes a $100 purchase, he or she pays their issuing bank the full $100. The issuing bank keeps their interchange fee – typically between 1 and 3 percent – and forwards the payment through the card network. When it reaches the merchant bank, that institution takes out their acquiring fee and remits the remaining balance to the merchant.
Whenever a buyer makes a purchase on a card, the vendor eats the cost of those fees. They are prevented by card network rules from charging card-using customers more than those paying by cash or check. As a result, their only options are to either choose not to accept cards and lose potential customers or to accept cards and take the hit as a cost of doing business.
In addition, the GAO report found that interchange fees have steadily increased and become more complex during the last two decades. According to the report, in 1991 Visa and MasterCard had four separate interchange fees (they vary based on industry). By 2009, they have 60 and 243 respectively. Also, in 1991 Visa’s interchange fees ranged from 1.25 percent to 1.91 percent. Today, they range from 0.95 percent to 2.95 percent.
These numbers may be a little misleading. While the lowest interchange fees have reduced, these are mainly fees on debit card transactions. However, fees on other forms of credit cards have continued to climb. Debit cards tend to have the lowest interchange fee structure of any card product.
One of the goals of the GAO report was to determine if the existing, unregulated interchange fee structure is too onerous on merchants. The report presents several potential regulations to make card acceptance less costly. These proposals include:
- Placing a ceiling on interchange fee rates
- Disclosing interchange fees to cardholders, either on receipts, in statements, or displayed at merchant locations
- Prevent card networks from limiting whether merchants can charge different prices for card and non-card transactions
- Allow merchants to negotiate interchange fees directly with issuers. This would require granting merchant groups an exemption from collective bargaining restrictions.
These changes would likely reduce interchange fees merchants pay, but could also have negative consequences. Some merchants would not see significant cost savings because they would then lower prices to stay competitive. Meanwhile, issuers could raise other costs on cardholders to compensate for lost interchange fees.
The proposals are not part of any proposed legislation. However, it’s important to be aware of them as the changes would directly impact the cost of goods. Interchange fee caps could bring your costs down when paying via card, but your costs could increase if vendors are free to charge customers more based on their payment method.
We’ll be sure to let you know if and when any of these changes become law.