The increase in bank interchange rates for some Visa and MasterCard transactions, which took effect April 1, left retailers and retail associations chagrined and wondering how they would respond.
"[Hy-Vee] is disappointed that the cost continues to increase," said John Briggs, senior vice president, chief financial officer and treasurer, Hy-Vee, West Des Moines, Iowa, and chairman of Food Marketing Institute's electronic payment systems committee. "It's been a general trend for some period of time, and I am not convinced the trend is over."
The increase "is a bad April Fools' Day hoax for retailers and consumers," said Jennifer Hatcher, senior director of government relations, FMI. "Visa and MasterCard have continued since the [2003 antitrust] settlement to find ways to increase costs for their own financial gains." With fraud and interest rates down, interchange fees should remain the same or be reduced, she added.
Interchange fees, set by Visa and MasterCard, are paid by banks that process card transactions for merchants. The fees are paid to cardholder-issuing banks to cover the cost of converting a card charge to a cash deposit at the merchant's bank. In one instance, the Visa interchange rate published by BA Merchant Services, Louisville, Ky., for the "standard credit" category, increased to 2.70% + 10 cents from 2.63% + 10 cents.
Merchant banks, in turn, may raise the fees they charge retailers for the card transactions. Though difficult to calculate since it's based on card type, retailer size and category, for supermarkets the new fee works out to about a 10% increase for Visa credit card transactions, according to Tolan Steele, senior vice president, interchange, Visa USA. "On the debit side, the net of the increases and decreases results in about a 6.5% increase," he explained. "Larger merchants will enjoy more discounted rates."
Consumers may end up footing the bill, said observers. "[Credit card companies] are asking consumers to fund [card-based] marketing and rewards programs," said Hatcher. "The problem is [rewards programs] benefit only a few customers, and everyone else is subsidizing them."
Although Hy-Vee will not necessarily increase the cost of groceries to help fund the increase, "anytime that you have escalating costs you have to look at your whole business," said Briggs.
According to Hatcher, supermarket profit margins equate to about 0.88% of a transaction. "We're looking at an [interchange rate] on that same transaction that is more than double the profit margin at 1.9%," she said. "That clearly can't be absorbed, and there is going to be an impact on price." Hatcher referred to the interchange fee charged for the Visa CPS Rewards 2 category of credit card transactions.
The National Grocers Association fears that the rate adjustments will result in an even more uneven playing field for independent grocers. "The new rates just continue to favor the mega-stores and the very largest volume national chains," said Stewart Zlotnikoff, senior vice president, NGA.
For its part, Visa pointed out that it took supermarkets' cost sensitivity into consideration in adjusting its rates, said Steele. "Supermarkets' rate sensitivity and the challenges they have in serving customers cost effectively was definitely key in determining the unique rates [set for them]," he said. Interchange rates "are lower for supermarkets than any other retail segment."
Both MasterCard and Visa said the increases are necessary to ensure competition. "These rate adjustments balance the interests of both the issuing and acquiring sides of the business in order to encourage increased issuance, wider acceptance and preferred use of MasterCard cards," said Barbara Coleman, spokeswoman for MasterCard.
Cost of transactions, protection against fraud, and funding for rewards programs also factor into rate adjustments, according to Visa's Steele.
"Consumers have come to expect rewards for [credit card] transactions, whether it be airline mileage or cash back," said Steele. "There is a cost to the issuer for [rewards programs]. In order to be competitive, we've got to make sure that the interchange revenue is there."
MasterCard declined to provide specifics about its rate structure, but according to the National Retail Federation, rate increases ran 9% or more for MasterCard corporate card face-to-face transactions. (This increase is not necessarily what a supermarket would experience.)