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Cited: ApparelNews.net

According to a recent study by Merchants Payments Coalition, merchants and American consumers pay more for credit card fees or interchange fees than in other industrialized economies.  These fees charged by credit card companies are a crucial cost that is becoming increasingly under the scrutiny of retailers who want to trim every cost of business from their mortgages to their utilities.

Two laws currently making their way through Congress were drafted to assist businesses renegotiate those fees.

U.S. Rep. John Conyers Jr. (D–Mich.) introduced HR 2695, the “Credit Card Fair Fee Act of 2009.” The proposed legislation was written to create a system in which merchants can collectively negotiate with banks over interchange fees. Sen. Dick Durbin (D–Ill.) introduced “The Credit Card Fair Fee Act,” S1212, which also intends to create a structure for merchants to bargain with banks.

The Electronic Payments Coalition is a Washington, D.C. based group that represents banks and credit card companies. It said interchange fees are merely a cost of doing business and that an average American interchange rate is 1.6%.

But according to the MPC study, released Sept. 14, interchange fees in the United States cost 2% of every transaction, compared with 0.5% charged per transaction in Australia and a 0.3% fee in the European Union.  The study claims banks and credit card companies made $48 billion from American fees in 2008, which is triple what they made from these fees in 2001. The Washington, D.C. based MPC is supported by retail trade groups such as the National Retail Federation, Retail Industry Leaders Association and California Retailers Association.

California boutique owners are watching the fight over interchange fees with interest, and they renegotiate their interchange fees with varying degrees of success.

Fred Levine is co-owner of the M.Fredric chain of boutiques, based in Agoura Hills, Calif.  He said renegotiating interchange fees is a crucial part of doing business. “It’s kept our rates low,” Levine said. M.Fredric has done business with Wells Fargo for more than a decade. He fields calls daily from other financial institutions that promise lower rates. Requesting his bank compete against other offers has helped keep rates low. But the success of his company has created better terms for processing fees.

“We pay a fraction of what we paid in the 1980s,” he said. “We used to pay 4.5% for American Express cards and 2% and 3% for Visa and MasterCard will. Our rates have gone down significantly based on the volume of the business and the average size of the ticket.” He did not divulge what the interchange rates were for his store.

Alison Muh is owner of Surly Girl, a Los Angeles boutique and accessories brand. She said lowering transaction fees by 1% meant great savings for her business. However, she said it was a hassle negotiating with processing companies. “The fine print in your contract often has hidden or misleading terms and cancellation fees,” she said.

Diane Merrick is the owner of the Diane Merrick boutique in Los Angeles. She said her processing fees were fair and the various offers to negotiate bank fees never seemed to result in important savings for her one-store boutique business. “It’s major, major work to change, and it ends up with very little change in monthly fees,” she said of renegotiating fees. “This is an important thing for big, big guys. For the little guys, it’s not a big deal.”

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Bringing in negotiators

There are better ways to cut fees than going through tough negotiations with finance companies, said James Van Dyke, president of Javelin Strategies, a Pleasanton, Calif. based research firm and consultancy that specializes in the financial-services industry.

He suggested retailers restrict consumer choice to payment methods with cheaper interchange fees. He said the PayPal payment systems and Arco service stations often nudge their customers to make purchases from debit cards or payment options cheaper than the higher-cost credit cards.

The nudging often means offering lower prices to those using preferred-payment systems. Other times, it takes nothing more than a simple request, he said. “A high-end retailer might post a sign in elegantly scripted gold lettering saying: ‘For convenience and safety, [this boutique] respectfully recommends that our valued customers use “XYZ” card,’” he said. Shoppers often take note of the sign and comply.

Reuven Cypers said he believes many retailers, large and small, need consultants to help guide them through the fine print of negotiating processing fees. Since 2001, his Los Angeles–based Associated Merchant Services, a division of Rocky Mountain ATM, has helped retailers find savings from several hundred dollars per month to $300,000 annually by knocking down processing fees.

One basic way to cut processing costs is to not lease credit card transaction machines from fee-processing companies. Cypers said buying machines often can be more reasonable than leasing. Buying a machine can cost $300, compared with leasing a machine, which can be $50 for a common period of 48 months. Like Van Dyke, he recommended nudging customers to use debit cards rather than higher-cost credit cards.

Associated Merchant Services consults with 2,500 merchants, and Cypers said business is growing. “When the economy is doing well, many merchants were not as concerned,” Cypers said about processing fees. “With the economy tightened so dramatically, everybody is concerned with how to save money and help the bottom line.”

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My Take: From a consumer’s point of view, I think they should reduce those damn fees because the merchant usually passes those fees on to the customer by raising their prices.  In never see merchants lowering their prices unless they’re trying to get rid of an overstock item or they are going out of business.  It would be nice to see one merchant who has the courage to follow one economic system.

That system is one that they teach in every economics class.  I believe they call it the “turnover” process.  (But do not quote me on this.)  The idea is very simple.  If you normally sell 20 widgets in a week at $5 a widget, that means you make $100 a week on widgets.  Let us say that the widget only cost you $2.50.  That means that your markup is 50% and you are making $50 profit every week.

How would you like to make $100 profit every week on the same widgets?  It is simple to do!  Usually when items are purchased in bulk, the larger the order, the smaller the cost.  If you normally purchased 20 widgets at a cost to you of $2.50 each, it is possible to order 40 widgets at $1.25, spending only $50.  This means that you could sell your widgets at $3.75, 75% of the price of your competitors, and make $100 in profit.

As you can see, you have doubled your profit and are now able to order and utilize those promotional bags to help increase your business.  This type of profit allows you to expand not only your business, but your advertising potential as well.  You might even be able use those recyclable poly bags and advertise your business as a “Green” business.

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