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Credit card firms say consumers side with them on merchant fees. Oh, really?

June 18, 2010|David Lazarus

Most U.S. consumers don't want the government meddling in how much banks and credit card companies charge retailers to process transactions made with plastic.

Moreover, most Americans think retailers, not card companies, should be covering the cost of those transactions.

How do we know this? Because Visa Inc., the giant card company, produced a survey this week showing that an "overwhelming majority" of Americans oppose lawmakers' efforts to lower fees charged for processing plastic.

This is remarkable for a number of reasons, not least that an overwhelming majority of Americans even have an opinion on credit and debit card processing fees, let alone that most consumers are siding with card companies.

In Tuesday's column, we looked at the debate over fees for debit card transactions and how an amendment being considered by lawmakers would require such fees to be "reasonable and proportional to the actual cost incurred by the issuer or payment card network."

Today let's look at credit cards, which can cost retailers more than three times as much as debit cards to process and which are increasingly falling under a host of new federal regulations as officials crack down on what they call the banking industry's most abusive practices.

The amendment to financial-reform legislation submitted by Sen. Richard J. Durbin (D-Ill.) wouldn't limit how much card companies could charge to process credit card transactions, but it would allow retailers to offer customers a discount if they pay with cash or a debit card rather than credit.

Fees charged by card companies to process credit cards can top 3% of the cost of a transaction — money that now comes out of the merchant's pockets and, in the case of large retailers, is often passed along to customers in the form of higher prices.

Fees for cards with hefty rewards programs, such as frequent-flier miles, can run even higher, with some merchants saying they approach 5% of the transaction.

Pasadena resident John Beaty told me these fees can be devastating for small businesses. He and his wife ran a knitting-supply shop, and Beaty said credit card processing fees typically cut his profit in half.

"After your wholesale costs and your overhead, there isn't much left," he said. "Paying 3% or more of each transaction to Visa or MasterCard left us with very little."

Beaty, 53, has been retired since closing his shop in 2007. It's not that the processing fees drove him out of business. But Beaty said they took away what little financial cushion his shop maintained for rainy days.

"Banks need to bear a higher proportion of the costs," he said. "They've put together a tremendous amount of infrastructure, but that infrastructure isn't new. It's been amortized since the 1970s."

Beaty said a fairer system would be to charge a flat fee of about 30 cents per credit card transaction, which he thinks comes closer to banks' actual processing costs.

That might even be a tad generous. Some industry watchers have told me the true processing cost is just a few pennies — and that includes the cost of technology updates, fraud protection and customer service.

They also wonder why merchants should pay 10 times more for a $500 transaction than a $50 transaction. What's the difference from a technical standpoint? A card swipe is a card swipe.

Ken Clayton, senior vice president of the American Bankers Assn., said the cost of processing credit card transactions should be whatever the market will bear.

"Who puts the value on the price of a ticket Jack Nicholson pays to watch the Lakers?" he asked. "It's however much Jack Nicholson wants to pay to sit in the front row."

Um, yeah, but Visa and MasterCard aren't selling preferred seating to merchants. They're selling the one-size-fits-all movement of data across their computer networks.

"Who knows what the right price should be?" Clayton replied. "And if anyone did know, why should it be based on the cost of providing the service? What about the value it brings to merchants?"

In other words, what does it matter if all puppies cost a hundred dollars when you consider how much joy they bring to little kids?

No wonder Visa feels comfortable trundling out a bogus survey showing massive support among consumers for allowing the plastic industry to remain its lovable, life-affirming self, without any pesky interference by government watchdogs.

According to the survey, 83% of respondents oppose having the government set a price for debit card transactions "if it would likely result in debit cardholders paying fees for owning and using their debit cards."

Of course, there's nothing in the legislation that would require cardholder fees for using plastic, but apparently Visa neglected to mention that to survey respondents.

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