Did Visa and MasterCard’s Fees Contribute to Forcing Starbucks to Close Hundreds of its Coffee Shops?

July 25, 2008

Next time you queue up at Starbucks for your daily fix of java, notice how many others in line are having the barrister swipe their debit and credit card to buy a two or three-dollar cup of coffee.

Did you know that the merchant interchange fee to process these electronic payments could cost upwards of 50-cents or more? That means a quarter of the gross revenues are being paid to Visa and MasterCard and its member banks – a 25% surcharge.

How many of those customers have easy access to change or a few bills to cover their coffee? Instead, they are becoming conditioned to charge it to their card. The credit card giants will explain that the convenience of the card leads to added sales, but what about the conditioned regular consumer who just wants their daily fix of coffee and is not intent on buying an espresso machine and other costly add-on merchandise each day?

I wonder if Starbucks has already pointed a finger at the gluttonous credit card associations for participating in what seems to have assisted in their financial woes?


Visa and MasterCard Branded Gift Cards Force Unjust Penalty on Consumers

July 25, 2008

Recently, I bought a new AT&T cell phone and the plan included a $50 rebate. Rather than providing a check or instant credit to my account, the new undaunted device to pocket even more money at the expense of consumers are electronic payment gift cards.

Here is how the scheme works.

A few weeks after the purchase, you receive an official looking Vias or MasterCard branded debit card. The problem is when you try using it. It is confusing and many retailers have a hard time processing it. The worst part – there are just micro-balances remaining. Retailers are unable to process te transaction, which means that those few remaining dollar balances vent away in the barrenness of never-to-be-claimed currency.

Try for yourself.

I still have a balance on the AT&T “promotional card” but cannot find anyone who can process it. Think of the millions of other micro-balances that remain unused. And, if you are successful in locating a merchant who can accept it, there is the dreaded interchange fee which force’s retailers to pay an excess amount each time the card is used.

Technology = Savings (Except With Credit Cards)

July 21, 2008

As technology has vastly improved the efficiency and speed of many services, we’ve come to expect cost-savings as a by-product.  If something requires less time and manpower, it makes sense that it should cost the provider less to provide and, in turn, the purchaser less to purchase.

Almost 20 years ago, when digital scanning came into mass use, my company charged $5 to scan a photo.  The machines were new and expensive, the paper and other tools also costly.  Today, the infrastructure is more affordable and the process faster – so we can do more scanning, in less time, at a lower cost.  We charge less than 5 cents to scan a photo – 1 percent of the price in 1990. 

Back then, when you charged something to your credit card, the retailer paid about 2 percent of the transaction total to the credit card company.  That “interchange fee” covered the cost of processing the transaction records we merchants created by running your credit card through the imprinter (remember your messy carbon copies?).  Someone at Visa or MasterCard had to go through all those paper slips and make sure the merchant was paid and the customer was billed.  For many the price seemed fair enough, given the convenience.

Today, we slip your card through a device that records your account number electronically and, at the speed of light, sends the credit card company an electronic notice of the purchase.  Computers figure it all up, put money in our account (also electronically) and bill you.  (If you’re like many people, you pay that bill on-line, another advantage of technology.) 

That streamlining of the process must mean that the interchange fee, like the price of our photo scans, also is a tiny fraction of what it was in 1990, right?  Wrong!  It’s still about 2 percent of the total transaction. Merchants – and in turn customers – still pay the cost of manual processing in a digital world.

Higher processing fees when processing costs are headed the other way isn’t how free markets are supposed to work.  But that’s the way this system works because Visa and MasterCard – which control 80 percent of the credit card market – don’t have to negotiate the fees with merchants. Whatever Big Credit says goes.

Card users haven’t complained much because most never heard of the interchange fee.  It’s not itemized on your monthly statement – but it is embedded in everything you buy.  And we retailers see it every month in our bank records, when Visa or MasterCard keeps that 2 percent. 

Today, one study shows, transaction processing consumes only about one-eighth of the interchange fee.  The credit card companies rightly use some of the rest for high-tech security measures that protect card holders from identity theft and the card issuers themselves from customers who don’t pay. But those costs also are relatively small.

Much of the current interchange fee goes for things customers and merchants probably don’t find essential.  Visa and MasterCard spend lavishly on advertising and junk mail, enticing us to use plastic even more often (and, in turn, hand over more interchange fees!).

To cover the interchange fee, the average American family pays more than $400 annually in additional costs for goods and services.

Regulators in Europe and Australia long ago saw the unfairness of this and demanded that credit card issuers roll back interchange fees.  Today, Congress has a chance to slash the hidden tax on credit cards. 

The Credit Card Fair Fee Act is supported by a number of both Republicans and Democrats on Capitol Hill.  It would end the current practice under Visa and MasterCard, and the banks issuing their cards, dictate the interchange fee to retailers.  From now on, retailers would negotiate fees with the credit card industry (primarily via retailer associations and trade groups). 

The Credit Card Fair Fee Act won’t be enacted, however, unless the millions of Americans who use those cards demand an end to this hidden tax.  The credit card lobby in Washington is strong.  The millions who pay the tax must speak up and demand an end to the outrageously high tax on credit card purchases.

Commentary by Mitch Goldstone, president and CEO ScanMyPhotos.com and editor of WayTooHigh.com – The Credit Card Interchange Report

Now Airlines Are Being Forced to Violate Their Merchant Credit Card Rules

July 19, 2008

According to The Travel Pirates blogger, Europe’s Ryanair is violating Visa and MasterCard merchant rules by charging extra for in-flight electronic payment transactions.  Click here to read more.  Where are the bank’s advocacy groups on this issue?  I don’t seem to have noticed any news releases on this subject from the American Bankers Association or community bank associations, or even Visa and MasterCard.

According to About.com, “Easyjet adds a single 7.50€ for the transaction, Ryanair adds 2.50€ per journey per passenger. If flying alone, Easyjet’s credit card fee is higher than Ryanair’s. If flying as a group, Ryanair’s fees are higher – a family of six will pay 30€ in credit card fees.”

According to Newsweek, “Ryanair.com charges a €1.20 fee for paying by debit card (online) but more than twice that (4 euro) if you pay with a major credit card. And note, if you get to the airport and are hit with more fees, you’ll be hit with a second processing charge as you pay them. So if you have a Visa debit card, bring that with you to the airport, too! The processing charge will only be €1.50 (versus €4 for a credit card at the airport).”

Non-profits like The Red Cross are even violating merchant credit card rules.  See below repost from an earlier commentary. 

Excerpt from About.com [Credit Card Processing for Nonprofits]:

  • Unfortunately for nonprofits, most of their transactions are not done face-to-face and fall into this category called “card not present” or “mail order telephone order (MOTO)” transactions. MOTO processing rates can also vary substantially based on the type of card and your organization’s processing volume – but it will typically be to 1% higher than a physically swiped transaction. (Personally, I can’t imagine someone who has stolen a credit card going online to make a fraudulent donation to their favorite nonprofit, but credit card companies don’t see it that way.)

Read the following FAQ from the American Red Cross Website:

  • Why do you require a donation amount of $5? Like any other online credit card processing system we are charged by credit card companies. We don’t want donors’ well-intended gift to be offset by processing fees.”

Interchange fees are seemingly forcing non-profits to violate their processing agreements. Like our retail and ecommerce business and millions of others, we are all precluded from requiring a minimum charge for an electronic transaction. Yes, in the American Red Cross’ own words, they require a minimum transaction of $5.00. Does this mean that Visa and MasterCard will withdraw electronic payment support and pull the plug on their network because of this violation? We think not, but it is one more lapse and glaring reason why we question interchange fees. Listed among the 270 page MasterCard Merchant Rules Manual, is this warning the merchants cannot require a minimum transaction amount. [from the MasterCard website page 2-22. “9.12.3 Minimum/Maximum Transaction Amount Prohibited. A merchant must not require, or post signs indicating that it requires, a minimum or maximum transaction amount to accept a valid MasterCard card.”]

Let’s not just pick on MasterCard. On the Visa site, they have a link and recommendations of various charities that you can make instant donation to, including the American Red Cross. But, there is no mention of the fast that a percent of each transaction is not going to the designated non-profit, but rather being paid in merchant interchange fees. See link. On page 9 of the 135 page Rules For Visa Merchants document, they too explain that “Imposing minimum or maximum purchase amounts in order to accept a Visa card transaction is a violation of the Visa rules.”

Visa and MasterCard’s Merchant Rules Are Irrelevant

“A New Business Model For Card Payments” (Via Diamond Management & Technology Consultants)

July 18, 2008

See below abstract from the Diamond Management & Technology Consultants report by Amy Dawson and Carl Hugener:

Credit and debit cards have been a major profit engine for issuing banks, but legal and possible regulatory challenges to the interchange model spell trouble for both issuing banks and the card associations that support them, MasterCard and Visa. The $150 billion card industry must recognize this threat to earnings and position itself for ongoing success.

For a well presented overview of the report, we are reprinting with permission the following blog posting by Sean Harper, co-founder of TransFS and TSS-Radio.

  • Where Does Interchange Go?  The biggest component (about 80%) of the credit card processing fees that every merchant must pay is “Interchange”. Interchange is a fee collected by Visa and Mastercard and passed along to the bank which *issued* the credit card that was used for the transaction.
  • A 2006 report by Diamond Consultants had some facts and figures that we found quite interesting. The report is worth checking out. It is no longer available on Diamond Consulting’s Website but it is available at the Internet Archive – A New Business Model For Card Payments. Highlights:

* “Credit and debit cards have been a major profit engine for issuing banks, but legal and possible regulatory challenges to the interchange model spell trouble for both issuing banks and the card associations that support them”

* “Card issuing banks and the card networks can’t be blamed for trying to maintain, or at least prolong, the current interchange fee model. It accounts, after all, for over $22 billion in annual fee income for Mastercard and Visa issuers and the associations”

* “Paying for issuer rewards programs consumes about 44% of interchange costs, but merchants get nothing out of these programs; they are competitive tools for issuers. Merchants likewise pay about 3% of their interchange dollars for association branding costs. Meanwhile, processing – the original reason for interchange – comprises only 13% of interchange costs.”

* “Merchants have little idea where their interchange dollars go. In addition to the 44% of interchange cost that goes toward rewards programs, our analysis shows that network branding takes 3% of the cost, and 35% goes to cover things such as cost of funds and profit margins.”

* “Merchants are especially irked because market forces as they understand them should be driving fees lower, not higher, and this is especially true for interchange. Their objections to this situation include: – card acceptance has reached a critical mass that no longer requires the same degree of brand building; – transaction volume has grown enormously and resulting economies of scale have driven down transaction processing costs; – fraud has decreased as a percentage of volume.”

* “Once transparency comes to credit card pricing models – as it ultimately does to virtually every industry and now may be beginning here with the recent decision by Mastercard to publish interchange tables – merchants will use the information to force an unbundling of interchange fee structures. The interchange structure as we know it will dissapear.”

As small business owners who have, in our previous businesses, felt significant pain from the cost of credit card processing, we at TransFS hope the above predictions occur. Our goal is to enhance tranparency in financial services by providing tools to help the consumers of financial products make better decisions and get better deals – for example, our credit card processing calculator and more detailed credit card processing report.

“Cracking Down on Hidden Fees” (via Washington Post)

July 18, 2008

A bill that would allow merchants to negotiate interchange fees directly with credit card companies cleared a hurdle this week. In a 19 to 16 vote, the House Judiciary Committee approved the Credit Card Fair Fee Act of 2008.

And what exactly are interchange fees? You may not know this but every time you use your credit card to buy something, the merchant has to pay a fee to your card company. That fee is non-negotiable. You, the consumer, end up incurring the cost of that fee because retailers include them in their prices. Supporters of the proposal say it ended up costing Americans $42 billion last year.

Click here to read the article.

[source: The Washington Post]

Merchants Are Already Lowering Their Prices In Anticipation of Interchange Fee Savings

July 17, 2008

ScanMyPhotos.com and 30 Minute Photos Etc. are not waiting for the closing bell to ring out what is a nearly $50 billion annual hidden tax on Americans.  While Visa and MasterCard and its highly paid advocacy groups suggest that merchants will simply pocket the savings, they are again wrong.

I understand why they are incorrect in suggesting that retailers will simply pocket the savings, after all, they are unfamiliar with how free markets work.  They are the ones that are anti competitive, involved with illegal price fixing and control a nearly 80% market domination on the electronic payment network; much as how the railroads operated in the 1800s, which prompted the Sherman Antitrust Act.

Today’s Credit Card Fair Fee Act is making a difference and my company has been on the front lines in this battle since we filed the first antitrust complaint for illegal price fixing against Visa, MasterCard and major banks in early 2005.

Over the years, we have asked the two giant card associations to rescind their fees on gasoline to help soften the nation’s economic energy crisis, and launched “Green Friday,” asking consumers to use cash on the Friday after Thanksgiving to help demonstrate the impact of this hidden tax.  Asking Visa and MasterCard to post the exact interchange fee for every transaction on every debit and credit card receipt would have helped promote more transparency as well.

Now, we are leading the way by lowering many of our prices in anticipation of a realized savings from potentially lower merchant interchange fees.

Note to Visa and MasterCard: The marketplace decides what people are willing to pay and competition among retailers forces us to be competitive.  Unlike with Visa and MasterCard, it is not like there are just two giant stores that control the entire merchant commerce system in the U.S – there are millions.   If one merchant pockets the savings, that opens the door for their competitor to promote that they instead are returning the savings back to the consumer.

In the case of Visa and MasterCard, they control a giant cartel – not much different from OPEC – and their monopoly disenfranchises most retailers.

An op-ed [“Don’t Pass the Credit Card Fair Fee Act”] in today’s Washington Times by Camden R. Fine, president and CEO of the Independent Community Bankers of America warns against passing the Credit Card Fair Fee Act.  In observing who he works for and represents, it is no surprise.

As a graduate from the University of Southern California I was humored that he commented on what is also our school mascot, the Trojans.   Mr. Fine, however, cautions against the Bill which he described as a Trojan horse.  He even warns that the Credit Card Fair Fee Act could “threaten a key component of our nation’s economy.”  Hardly, but it could threaten the financial institutions that he associates with.  At least he used the word “scheme” in describing the interchange fees.  After the past years of fiscal mismanagement, consumers are weary of trusting banks, but Mr. Fine suggests that the banks have “lots of experience with big retailers trying to limit competition.”  They have experience alright, but for their and Visa and MasterCard’s anti competitive and cartel-like price fixing on merchant interchange fees. 

Mr. Fine doesn’t understand that the reason why many merchants are battling the banks and Visa and MasterCard is because they are impacted by these unfair fees.  Entrepreneurs who own independent service stations are equally impacted and nearly 3,000 service stations have closed in the past year, partly due to these record and unjustified charges.

We currently have price controls that are imposed not on banks, but on merchants and consumers who are forced to pay whatever rates Visa and MasterCard dream up.  Mr. Fine’s argument is no different than the railroad robber barons’ from the 1800s when they forced their anti competitive charges on farmers; there was no competition and there is little competition today as retailers are forced to use the Visa and MasterCard payment network.