Sunday, June 12, 2005

Merchants Balk at Credit Card Fees

By GWENDOLYN BOUNDS and ROBIN SIDELStaff Reporters of The Wall Street Journal. -4-24-05 - From The Wall Street Journal Online

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The letter that arrived in late February at 30 Minute Photos Etc. was so nondescript that co-owner Carl Berman nearly tossed it in the trash. But then he read the fine print that infuriated him: As of April 1, merchants like 30 Minute Photos would pay a higher fee when customers used one of several premium Visa and MasterCard credit cards issued by the country's biggest banks.

Merchants swallow the per-transaction "interchange" fees they fork over when customers pay by plastic because they chalk it up to the price of doing business in a credit-card world. But now they are incurring increasingly higher fees for certain trendy cards that give affluent consumers an array of perks -- from an early chance to score hot concert tickets to snagging reservations at a popular restaurant.

As a result, a backlash is brewing among small-business owners who say they are hurt by the fee creep more than bigger merchants. To fight back, the owners of 30 Minute Photos, for instance, e-mailed a letter to 25,000 customers on March 31, asking them to contact their charge-card providers to justify the fee increase.

"This is another one of those opportunities for credit-card companies to enhance their revenue stream on the backs of merchants," says Mitchell Goldstone, co-owner of the Irvine, Calif.-based photo-developing retailer that also operates a national online photo service.

Fee increases aren't limited to premium cards. The National Retail Federation estimates that the latest round of interchange fees will raise rates anywhere from 2.7% for a basic Visa card transaction to 9% or more for a transaction made with a corporate card from MasterCard. All types of credit cards are included in the fee increases -- premium cards linked to airlines, for instance. Fees on a few cards will actually drop; Visa recently lowered some debit-card interchange fees.

But the gap between the fee rates for basic and premium cards is widening. On April 1, MasterCard for the first time raised the fees on its premium World card higher than those on its normal card. Visa, which had already been charging more for the use of its high-end Signature card, has raised those prices again.

For example, a business owner who sells a $100 pair of earrings may pay $1.65 in interchange fees if that customer uses Visa's Signature card. The same purchase made on a basic Visa card might cost the merchant $1.51. But the pricing structure is far from simple. Like the intricate fare schemes in the airline industry, there can be dozens of interchange rates at the same time, based on the types of merchants and the amount of card transactions they generate. Big merchants with large numbers of transactions can often negotiate better interchange rates from Visa and MasterCard than smaller businesses. A large gas station chain, for instance, may pay less than the owner of a single restaurant.

Merchants can't pick and choose which cards they accept from customers once they sign a contract with Visa or MasterCard. The card associations set the interchange rate, but the banks issuing the cards receive the fees. Over the past year, Visa and MasterCard have intensely promoted "premium" credit cards to banks, particularly Signature and World, in an effort to get more cards into American wallets in what is a maturing credit-card market. Banks are more likely to promote the cards if they garner a higher fee.

Now that merchants are expected to foot more of the bill while customers receive perks, some are devising ways to discourage credit-card use. One tactic: encouraging customers to pay by alternative means. "I'm going to aggressively welcome checks now," says Joe Hodulik, owner of Framers' Workshop Inc. in Lake Forest, Calif. Same with Mike Steffens, who runs Essence Entertainment Talent Agency in Costa Mesa, Calif., and has written letters to his credit-card processor to complain about the fee increases. "I'm real anticredit," he says.

Leslie Blesius, owner of the high-end home furnishings store Jolie Maison in Highland Park, Ill., is considering imposing a minimum purchase of $20 for customers who pay by credit. Credit cards, she says, are "becoming very cost-prohibitive for me." As for the higher fees on premium cards, she asks, "Because someone gets something from United Airlines should I be paying a higher fee?"

Among the perks customers who use Visa's Signature card may receive: landing the penthouse suite at the upscale Bellagio hotel in Las Vegas and getting silver products personalized from a variety of chic stores.

MasterCard's World, meantime, has a concierge service to help cardholders get golf tee times or with personal shopping. Consumers sometimes pay a higher annual fee for these prestige cards than the run-of-the-mill variety -- the Northwest Airlines Signature card from U.S. Bancorp costs $90 a year, for example. The banks use the interchange fees to help pay for the loyalty programs associated with the cards.

Ultimately, consumers may feel the effects of the fee increases if merchants raise prices to cover their costs. The National Retail Federation, for one, calls the fee increases a "hidden tax increase for American consumers."

"What good is it for me when they show up with a premium card?" asks Taylor Bond, president and chief executive of Children's Orchard, an 85-unit franchise reseller of upscale children's clothing based in Ann Arbor, Mich. "For an organization like ours where every penny counts, we are a bit befuddled about how this does anything for us but subtract from our bottom line."

While bigger businesses can absorb the fees more easily or pass them along unnoticed by raising prices a few pennies, small businesses say they risk alienating customers when they're forced to raise prices. "What consumers don't get is that when a fee is passed on to a business, sooner or later it gets passed on to a consumer," Mr. Steffens says.

Visa and MasterCard say the new rates are justified because consumers who use the premium cards tend to spend more, which in turn benefits the merchants. MasterCard estimates that its World card, introduced in late 1996, generates six times more transactions per card than its platinum card. Overall spending on the World card is seven times higher than on platinum.

For Visa, the eight-year-old Signature card represented about 10% of the $1.04 trillion in sales charged on Visa cards last year. Notably, Visa launched a new advertising and marketing push for Signature last year and introduced another tier of pricing for merchant fees for a midlevel card called Traditional Rewards that is higher than its basic card.

The latest round of interchange fee increases comes at a time when Visa and MasterCard are facing more competition than ever from longtime rival American Express Co., which is widely regarded as having the highest interchange rates in the industry. Another big rival: debit cards, which are the fastest-growing segment of the card business and have lower fees than traditional cards.

American Express doesn't disclose its interchange fee, but its U.S. "discount" -- which includes interchange and other fees on all the cards it offers -- averaged about 2.4% last year -- or $2.40 for every $100 spent. A Morgan Stanley report found the weighted average for Visa and MasterCard interchange fees will rise to 1.86% in 2010 from the 1.75% rate last month.

American Express is also taking on Visa and MasterCard when it comes to financial institutions. For years, Visa and MasterCard prohibited their member banks from partnering with American Express, but those rules have now been tossed out, leaving the marketplace open. American Express has already formed partnerships with Citigroup Inc. and MBNA Corp.

"Although Visa and MasterCard's premium cards have been around since the late 1990s, each organization has re-emphasized these products in order to pre-empt member banks from joining forces with American Express," wrote Kenneth Posner, a Morgan Stanley analyst, in the report issued last month. He estimated that premium cards account for about 18% of MasterCard and Visa's consumer sales volume.

In the heated war for a slot in consumers' wallets, the credit-card companies and banks want spenders such as Todd Selby, a professional portrait and fashion photographer in New York City. Mr. Selby, who travels frequently, says he uses an American Airlines-affiliated credit card "for everything." As a small businessman, he considers the fee increases "absolutely ridiculous."

Aside from encouraging customers to pay by cash or check, small-business owners say they are frustrated by their lack of options. Mr. Selby complained to his credit-card provider but was told, "it's not our department." Mr. Hodulik of Framers' Workshop is taking a different approach. If a customer uses a premium card to pay for a purchase, he says he'll tighten his belt in other ways: "I just won't eat out that night."

[source: South Coast Today / WSJ]