Sunday, August 19, 2007

"Rewarding? Banks Like Signature Cards, But Others Cite 'Hidden Costs' (via The Winston-Salem Journal)

[The below article is one of the best profiles we have recently encountered on the disconnect over hidden merchant interchange fees]

By Richard Craver

Financial institutions and merchants are engaged in a marketing tug-of-war over check-card transactions, with consumers’ signatures the focus of the fight.

At least six banks and one credit union serving the Triad are offering rewards, such as airline and hotel discounts, brand-name merchandise and gift cards, to encourage consumers to select credit for check-card purchases.

Signing for a check-card purchase, instead of using a personal identification number, or PIN, converts it into a credit transaction. However, the money still comes out of a checking account.

“The idea of earning rewards points, on everyday purchases that members are already making, seemed appealing to our members,” said Rick Jennings, a senior manager of support services for Allegacy Federal Credit Union. The other financial institutions are Bank of America Corp., BB&T Corp., First Citizens Bank, RBC Centura, SunTrust Banks Inc. and Wachovia Corp.

“Just as you have seen the availability of credit-card rewards programs increase, a similar trend appears to be developing with check cards and debit cards, particularly as the cards continue to grow in popularity as a payment method and institutions respond to competition,” said Nathan Batts, an associate counsel for the N.C. Bankers Association.

However, several retail trade groups are discouraging consumers from signing for check-card purchases. Although the groups said that those transactions are being marketed as a no-cost frill for consumers, they stress they carry “hidden costs” that lead to higher prices at retail and the gas pump.

A battle over fees

The retail groups, including the Food Marketing Institute, National Retail Federation and National Association of Convenience Stores, have created Web sites, such as, to counter the financial institutions’ marketing.

“We believe this marketing come-on is driving up the cost at retail for most consumers while rewarding a limited number of consumers,” said Craig Shearman, a public-relations official for the National Retail Federation.

Why all the fuss?

Merchants pay interchange fees to Visa and MasterCard for the handling of credit transactions, whether credit card or a signature check card. Another, less-expensive collection method is typically used for debit-card transactions that require a PIN number. The bulk of interchange fees associated with credit transactions go to financial institutions, according to analysts.

Nationally, 36 percent of banks now offer check-card reward programs, according to a report by the American Bankers Association. Most programs require a signature transaction, but Bank of America offers reward points on a sliding scale for signature and debit check-card transactions.

“All Bank of America check-card rewards programs allow the customer to choose the type of purchase that is most convenient for them,” said Diane Wagner, a spokeswoman for the bank.

On average, there is a 2 percent interchange-fee charge for credit-card transactions, between 1 percent and 1.25 percent for signature check cards, and between 0.3 percent and 1 percent for debit check cards. The higher the transaction amount, the higher the interchange fee.

For example for a $60 purchase, the average interchange fee is $1.20 as a credit-card transaction, 60 cents to 85 cents as a signature check card, and 20 cents to 60 cents as debit.

“Choosing the credit key earns interchange income from Visa USA for Allegacy, which is given back to you in the form of higher savings rates, low or no fees and lower loan rates,” according to Allegacy’s marketing pitch for its check-card rewards program.

The difference in fees works out to be substantial, considering that there have been at least three times more signature check-card transactions as debit in recent years, according to a report from the Chicago Federal Reserve Board. There also are four times as many merchants that accept signature check-card transactions (6 million) as PIN transactions (1.5 million), according to financial institutions and retail trade groups.

According to the Merchants Payment Coalition, credit-card companies and financial institutions collected more than $36 billion in interchange fees in 2006 - up 117 percent from 2001.

“Unlike other credit-card fees that show up on your monthly statement, the credit-card interchange fee is hidden,” the coalition said. “Credit-card company rules make it practically impossible for merchants to tell customers how much they are really paying.”

The check-card rewards include “memorable” experiences, such as being an honorary crew member for a day for a NASCAR team (Bank of America), a lunch train ride for two through Napa Valley wine country (Wachovia) or zero-gravity airplane flight (SunTrust). First Citizens is holding a weekly reward-points sweepstakes through Sept. 29 for customers who sign for their check-card purchases.

A signature check-card transaction has value beyond reward points, the financial institutions said, such as increased identity-theft protection and better merchant identification than a debit transaction.

The check-card reward programs are not really a sign of how competitive the market is becoming for deposits, said Tony Plath, a finance professor at UNC Charlotte.

“It’s more a sign of the growing importance of fee income to the banking industry in a market where the (interest) yield curve has been darn near flat for most of the last two years,” Plath said.

The programs differ considerably in the amount of money required to earn rewards points.

Some Bank of America, BB&T and Wachovia check-card products offer a point for every dollar spent, while Allegacy’s ratio is a point for every $2 spent, SunTrust’s is a point for every $4 spent, and RBC Centura’s is a point for every $5 spent. Allegacy is running a promotion offering double reward points.

The merchant groups also criticize the amount of points required to earn a sizable reward.

For example, it takes 85,000 points to earn Wachovia’s lunch train ride for two through the Napa Valley wine country or 473,700 points for the zero-gravity airplane flight offered by SunTrust. But some $10 restaurant and retail gift cards require just 1,500 points for redemption, and SunTrust offers a cash credit to checking accounts with as few at 3,500 points.

There’s clearly a trend where checks and cash are being replaced, said Scott Qualls, the manager of BB&T’s deposit-access products. “As those are replaced, that reduces the merchant fees for cash and reduced their losses from checks, and drives down their overall cost of payment,” he said.

But Mallory Duncan, the general counsel for the National Retail Federation, said that signature check-card transactions are part of financial institutions’ strategy for “getting more consumers into the habit of choosing credit with their check-card purchases and signing for all purchases.”
“As more consumers sign for check-card transactions, it becomes easier for the credit-card companies to raise their interchange fees,” Duncan said.

About 4.2 cents of every gallon of gas sold nationally in 2006 went toward paying for credit-card transaction fees, said Jeff Lenard, a spokesman for the National Association of Convenience Stores.

“Every consumer pays this amount regardless of how they pay for their gas,” Lenard said. “Essentially, cash customers are subsidizing check-card reward programs through higher pump prices.”

The average grocer makes a profit of about 1 percent on sales, Steven Smith, the chairman of the Food Marketing Institute, said during a July 19 appearance before a U.S. House judiciary committee.

With credit-card interchange fees being 2 percent or more of a sale, “the effect is that fees set collectively by the credit-card companies are now double the industry’s profit margins,” Smith said.

“Basically, it comes down to a decision to either swallow hard and pay high fees that are set with no competitive influences, or turn your back on the 65 percent of your revenue from customers who have been influenced by the card industry’s advertising to believe they are social outcasts if they pay with actual cash,” Smith said.

U.S. Rep. Mel Watt, D-12th, said he expects that there will more hearings on interchange fees to “get a better feel of how the interchange fee system works and who is paying for it.”

Interchange fees have drawn the attention of Consumer Reports, said Matt Fields, the communications counsel for the magazine. “I think it’s fair to say that it will be a large part of Consumer Reports’ study on the ‘dark secrets of debit cards’ due later in August,” Fields said.

Most local community banks said they are considering offering similar programs.

“While some institutions tie in to just a check card and/or credit card, our product will reward them for all accounts they have with us and usage within all accounts,” said Daniel Duggan, a vice president of marketing for Yadkin Valley Financial Corp.

Duggan said that Yadkin Valley is aware of the tension caused by the interchange fees. “We hope customers will use it as a debit when and where they can to help minimize the fee exposure to the business,” Duggan said.


Signature vs. PIN transactions

• One-third of financial institutions offer check-card reward programs, primarily large banks.

• Thirteen percent of consumers are enrolled in a check-card rewards program, up from 8 percent in 2003.

• Of financial institutions with check-card rewards, 71 percent offer the rewards for signature transactions only.

• Fifteen percent of check-card holders have accounts subject to a fee for each PIN transaction, while just 1 percent have accounts subject to a fee for each signature transaction.

• Forty-six percent of check-card holders plan to use signature transactions more often because of a reward program; 16 percent plan to use PIN transactions more often because of a reward program.

Source: Federal Reserve Board of Chicago; American Bankers Association

[Source: Winston-Salem Journal]