Small-Business Owners Lobby to Cut Credit Card Fees
Small merchants have long chafed at the fees they must pay banks every time a customer swipes a debit or credit card. But now, with business slowing and every dollar important to their bottom line, some merchants are pushing for changes.
The merchants are lobbying for legislation that would compel banks to negotiate fees with them and are supporting a second measure that its sponsors calls a “credit card bill of rights for merchants.” At the same time, some merchants are seeking class-action status for litigation claiming antitrust violations by banks and the MasterCard and Visa card networks.
Alan L. Carsrud, professor of management and entrepreneurship at Florida International University in Miami, said small-store owners have little choice but to accept the cards. “If a mom-and-pop merchant doesn’t like paying them, it can’t just stop taking cards — it would bleed customers because Americans have been socialized to use plastic,” he said.
“Although all merchants are facing real problems about profitability,” he added, “this may be a life and death matter for the small ones.”
A typical merchant card payment has two parts: an “interchange fee,” which includes an average 1.7 percent of the sale price and a flat per-transaction fee, and a separate fee that goes to the merchant’s bank. Take, for example, a driver who pays for a $1,000 car repair with a credit card. The bank that issued the consumer’s card receives an interchange fee of $17.10 (including a 10-cent flat fee), while the repair shop’s bank gets $4, or four-tenths of 1 percent of the total sale. The repair shop pockets $978.90.
In 2007, merchants paid $61.56 billion in electronic payment fees, up from $48.58 billion in 2005, according to the Nilson Report, a payment systems industry newsletter.
“What merchants are getting for their money is convenience, risk management and guaranteed payment,” said Denise Dunckel, a spokeswoman for Visa Inc.
Various factors make every interchange fee unique. If the magnetic strip on the consumer’s card does not work and a cashier has to enter its number manually, for example, a higher charge results. If the card “rewards” the consumer with cash back or airline miles, that, too, has a higher charge.
Beyond setting fee schedules, card agreements also reach into merchants’ daily operations. Merchants who take cards are supposed to accept them for purchases of any size. But to protect profits from customers who use plastic for everything — a recent Visa television advertisement campaign humorously suggested that only social malcontents pay with cash — some small merchants break the rule and set minimum amounts for card purchases.
“Why shouldn’t you be able to set a minimum?” asked William Dennis Jr., senior research fellow for the National Federation of Independent Business in Washington. “Some of these small guys may actually lose money on a $2 or $3 credit card charge.”
Mitch Goldstone, who owns ScanMyPhotos.com, a photo-imaging venture in Irvine, Calif., and blogs about interchange fees at www.WayTooHigh.com, said he decided to challenge the fees in 2005 after learning that fees on reward cards were going up. “I can barely understand them and I’m a lead plaintiff in the merchant litigation,” he said.
The credit card industry contends that merchants are getting good value for their contribution to the rewards card programs.
“Merchants derive significant gain from the electronic payments system, which has evolved new features such as rewards programs,” said Trish Wexler, spokeswoman for the Electronic Payments Coalition, an advocacy group in Washington. “Ultimately, merchants benefit from rewards programs because people buy more when they use cards. Higher fees for rewards cards are justified because merchants and consumers both share in their expense — but merchants want to pass their fair share to consumers, who’d be hit with higher credit costs and reduced rewards if the merchants succeed.”
Representative Peter Welch, a Vermont Democrat who has sponsored one of the measures in Congress, said he planned to reintroduce a “credit card bill of rights for merchants,” as he calls it. “Our American merchants are paying the world’s highest interchange fees, a fast-increasing cost of business for them, with literally no protections,” he said.
The congressman said the merchants told him about their card problems when he set up tables at Vermont country stores. “Some Vermonters who owned multiple gas stations said that to deal with rising gas prices and interchange fees, they wanted to experiment with cash-only at some and the status quo at others, but were told this would violate their card agreements,” he said.
In July, the House Judiciary Committee, with bipartisan support, narrowly passed legislation that requires banks and merchants to negotiate interchange fees. The measure is sponsored by Representatives John Conyers Jr., the Michigan Democrat who is chairman of the committee, and Chris Cannon, a Utah Republican who was defeated in the summer primaries. Small banks and credit unions testified that fee reductions would take away badly needed income.
Kenneth J. Clayton, director of card policy for the American Bankers Association in Washington, called the bill “a dramatic proposal by big retailers to use political muscle to lower their costs.” Smaller retailers, he said, “are being put up as poster children to show how challenging it is for them. But behind the scenes are big-box stores that see an opportunity to lower their costs of participating in the electronic payments system that benefits them greatly.”
Professor Carsrud said that while card fee reductions would save large merchants the most in terms of absolute dollars, small ones would gain, too, because they have few options to reduce costs. “They can’t easily raise prices now, and they may not survive if they slash payroll or marketing,” he said.
The National Federation of Independent Business and the National Small Business Association, also based in Washington, remained neutral on the Conyers-Cannon bill and on a companion measure sponsored by Senator Richard J. Durbin, Democrat of Illinois.
A spokeswoman for the National Small Business Association, Molly Brogan, explained in an e-mail message: “While we recognize the significant issues surrounding the inability of small businesses to properly negotiate interchange fees — especially with the nation’s top 10 banks controlling 88 percent of credit-card receivables — we are focused on broad credit card reform. Given our diverse membership, interchange fees impact our small businesses differently — some members rely on credit card rewards, offered at the cost of our other members who are forced to pay for them.”
Ronald Mann, a law professor at Columbia University and a credit specialist, said he expected that there would be “a tremendous push in Congress in 2009 to adopt important credit card reforms” because of the increased sensitivity to banks’ lending practices.
But, he added, “Merchants’ card problems — even though especially pressing for small ones — do not top most legislators’ agendas.”
Not far from the Capitol in Washington, the owner of the Cleveland Park Valet dry cleaner, Robert Kotchenreuther, said he counted on customer relations, not legislation or litigation, to keep his card fees down. “I hate credit cards,” he added, “but I’d lose too much business not taking them.”
Mr. Kotchenreuther said he had “quite a few customers who are very understanding and caring and pay by cash or check because they know it costs me each time I use the card machine.” He estimated that he paid $5,000 to $6,000 in card fees each year — money, he said, that could “help me upgrade my 1994 van with 125,000 miles.”
Mr. Kotchenreuther carries two cards of his own: a small-business credit card and a Upromise credit card that rewards users with college tuition dollars.
But Mr. Kotchenreuther said he could not remember the last time he used either card. “If I go to another small merchant, I know he has to pay a fee to use his machine, and I don’t like that — I pay cash.” Nor does he pay with cards at bigger businesses. “If I need a hotel room or rental car,” he said, “I’ll use a card to hold them and pay cash when I get there.”
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