interchange fees

Staying Alive

The struggles of a business trying to survive.

I’d like to thank everyone who took time to comment on my posts on searching for credit card processing. Many of those comments shed additional light on aspects of the experience that I, for the sake of brevity and clarity, left out. As I hope I made clear, the world of card processing is extremely complex. Here are a few further thoughts, in no particular order:

Obviously, there is no one best solution for everyone. You will need to identify the size of your typical transaction and project a monthly charge volume in order to start the shopping process. My situation is unusual in that my transaction size is large and I never swipe cards. If I were running a restaurant or a store, I would have different needs. But I am sure that every merchant would benefit from a deal that has no fixed term and that you can get out of at minimum cost. Many providers are willing to waive term requirements and cancellation fees.

It also seems that leasing a terminal is a bad idea — it is much less expensive to buy one. Another warning that everyone should heed is to enter a personal identification number with debit card transactions. If you don’t, you will be charged very high interchange fees, instead of the low costs mandated by the Durbin Amendment.

My posts concentrated on the structure of the deal and short-changed discussion of pricing alternatives. Commenters were divided into two camps: those who favored interchange-plus pricing and those who liked a fixed fee, as offered by services like Square and Stripe. Nobody had anything good to say about tiered pricing (that link goes to an article that is informative but has a definite point of view). And there are still other pricing options out there. If you are looking for a short, authoritative look at all of the pricing alternatives, I wish you luck. The most comprehensive page I found was at Wikipedia. It offers concise definitions for the terms you might run across in your search but little guidance as to what might be the best choice. All of the other information I ran across was provided by someone who was trying to sell a particular type of transaction and should be understood in that context.

That said, I was intrigued with the service offered by CardFellow. This site allows you to submit information about your business and get offers from various processors. I tried it out and was quickly contacted by a company that promised me interchange plus .1 percent, a very attractive rate, along with a no-term contract and waiver of all cancellation fees. That seems to be about as low a price as anyone will offer. The accompanying agreement that I reviewed had all of the usual unfair provisions — the acquiring bank can levy a reserve account and change the deal any time it wishes. I have not seen an agreement that omitted all of this, but perhaps someone, somewhere, is offering one (let us know!). What I liked about CardFellow was the opportunity to get a variety of quotes and the site’s well written blog (not unbiased, but informative).

If you are looking for a single place to see reviews of various merchant service providers, take a look at Merchant Maverick. I came across this site while searching for information on CardFellow, and I read a few reviews. I liked the format. I have no idea whether it is doing a good job, but at least it offers a point of view. It didn’t offer reviews of PNC or Emerald World, but it did review Wells Fargo and WorldPay, both of which I have dealt with — and those reviews seemed to comport with my limited experiences. Merchant Maverick also has reviews of point-of-sale systems and shopping-cart providers — something for everybody!

Nobody had much to say about American Express. It seems as if we are all stuck with the company’s high fees and slow payment. Last year, about a third of my card transactions were American Express transactions, and I paid a little less than 4 percent in fees. I should probably stop accepting American Express — it is of no benefit to me, as a merchant. I would bet that most of the people who offer us an American Express card also have a regular credit card and that refusing it wouldn’t cost me sales.

One point that did not come up in comments but that I thought about a lot during this ordeal was whether worrying about credit card fees was a good use of my time. Here’s the sad math: even if I cut my card processing costs in half, my savings would be 2 percent of $400,000. The $8,000 savings is not insignificant, but there are many issues I could have spent time on that might have yielded similar or greater savings.

The more I learned about the credit card industry, the angrier I got, but rage is not a great reason to burn a lot of hours on a project. My free time is precious. I always have a list of things I can do to improve profitability. For example, I could have been working on my pricing spreadsheets to make our quotes more accurate. Or I could have dug deeply into our labor costs, or spent time on the shop floor making sure our procedures are as efficient as possible.

Credit card costs are on that list, but a rational analysis probably wouldn’t place them at the top. There is much more money to be saved elsewhere. Of course, the service providers know this, and the market is clearly structured on the assumption that this is true for the vast majority of small businesses — it takes a huge amount of time to figure out what is going on, and at a certain point, most merchants will give up and accept the deal that is being offered, just to get it over with. That’s what I did – after all of the time I spent with Wells Fargo and Citizens, I decided to just pull the trigger on Emerald World. It was a much better deal than I had at the time with PNC, so I went ahead with it. Now that commenters have exposed more options for my consideration, I may or may not revisit the issue. I’ll work with Emerald World for a while and see what happens.

I hope that the hours I spent on this project are of use to you. If anyone has anything further to add, please comment.

Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside Philadelphia.

Article source: http://boss.blogs.nytimes.com/2013/04/09/processing-credit-cards-and-anger/?partner=rss&emc=rss

The cap was mandated last year in the Dodd-Frank financial regulation law, but the Fed action was far less draconian than bankers had feared. The new cap of 21 to 24 cents a transaction, down from an average of 44 cents before the law passed, is roughly double the 12 cents tentatively proposed by the Fed last December.

Consumers are unlikely to see any immediate change at the register because they do not pay the fees directly. But merchants have complained that as the cost of debit fees — a charge for processing payments — has risen in recent years, they have had to add it to the prices they charge. The new lower fees may eventually be reflected in lower retail prices for consumers or, most likely, in a slight slowing of price increases. But banks said the caps would not pay for the cost of operating their electronic debit card networks, and they have warned that their customers can expect higher fees for other banking services as a result.

In approving the lower fees, the Fed’s Board of Governors said there was no way of knowing what the effect of the new rules would be, although they will be watching the results closely.

“I think this is the best available solution that implements the will of Congress and makes good economic decisions,” Ben S. Bernanke, the Fed chairman, said in voting to approve the rule. The board voted 4 to 1 in favor, with Elizabeth A. Duke dissenting.

Ms. Duke said her primary concern was about an exemption built into the law that gives smaller banks with less than $10 billion in assets a pass on the fee cap. These smaller institutions could charge retailers a higher transaction fee for debit card purchases.

Ms. Duke and other governors questioned whether and how that exemption would work. The board agreed to monitor the charges, known as interchange fees, to see how the revenues of small banks were affected, and whether merchants appeared to be rejecting cards that they knew would require them to pay a higher processing fee.

The new fee schedule includes three parts: a maximum interchange fee of 21 cents; a 1 cent addition that is allowed if the bank issuing the debit card develops a fraud-prevention program; and a variable charge of 5 basis points, or five one-hundredths of a percentage point, of the value of the transaction to recover a portion of fraud losses.

For the average debit card transaction of about $38, that variable fee would be roughly 2 cents, which would produce an upper limit, on average, of 24 cents a transaction.

The new rules will go into effect on Oct. 1. The Fed will accept comments on the proposal to allow a 1-cent addition for fraud-prevention efforts.

Since the Dodd-Frank law passed last year, lobbyists for consumers and retailers have been butting heads with bankers over the fee-setting process. At one point this month, banks pushed hard for a Senate measure aimed at delaying the fee caps, which was defeated in a floor vote.

Banking trade groups, retailers and consumer advocacy organizations all expressed some dismay at the Fed’s announcement — the bankers because they stand to lose fees and the retailer and consumer groups because the final charges rose sharply from the Fed’s initial proposal.

“While Congress spoke clearly that fee-fat banks can no longer sneak billions of dollars in stealth charges from debit card users, it appears that the Federal Reserve buckled under the weight of the banking lobby,” Bartlett Naylor, a financial policy advocate for Public Citizen, said in a statement.

Mallory Duncan, chairman of the Merchants Payments Coalition, a retailers’ group, called the new rule “unacceptable to Main Street merchants” and said the Fed “very clearly did not follow through on the intent of the law.”

Some banking groups also adopted a glass-half-full position. Frank Keating, president of the American Bankers Association, said the Federal Reserve took “a significant step in reducing the harm that could have resulted from the proposed rule.”

“The final rule still represents a 45 percent loss in revenue that banks use to provide low-cost accounts to our customers, fight fraud and maintain our efficient U.S. payments system,” Mr. Keating said. “Consumers will see higher fees for basic banking services, and banks — particularly community banks — will still feel the revenue pressures that this rule will cause.”

Merchant trade groups said retailers paid $20.5 billion in fees last year to accept debit cards, including processing fees.

Article source: http://feeds.nytimes.com/click.phdo?i=920cadfeb2fecfe480a4c4a62b4e98e3

Staying Alive: Processing Credit Cards and Anger

Staying Alive

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