CREDIT CARD INTERCHANGE FEES IRK RETAILERS

MARK HAMSTRA

CHICAGO - Rising credit card interchange fees are among the top concerns of food retailers, according to supermarket executives interviewed at the Food Marketing Institute show here last week.

"The banks are playing with a loaded deck," said Norman Rich, chief executive officer, Weis Markets, Sunbury, Pa. "The costs should be going down because there are more and more people using cards, but that's not the case."

According to Rick Mills, chief financial officer, Weis Markets, interchange fees for accepting credit/debit cards increased 18.1% in the company's most recent fiscal quarter, compared with the same period in 2005.

"This one line-item expense increased 700.2% from 1995 to 2005, while customer utilization increased 560.6%," Mills said.

Card usage has increased significantly, especially with the proliferation of debit cards, but the fees that banks charge for processing those transactions have increased at an even faster rate, so that now they account for nearly 2% of sales, he said.

"Something's wrong," said Tim Hammonds, president and CEO, FMI, in a presentation at the conference. "Why doesn't the competitive model work? With credit cards, the model is upside down."

Visa, MasterCard and the issuing banks "come together as cartels," Hammonds said.

As the banks that issue the cards are offering more and more rewards for their customers who use them, they are trying to recoup their costs by charging the higher interchange fees, he said.

According to a recent FMI member survey, interchange fees for credit cards and debit cards are supermarket operators' No. 2 concern, behind rising fuel costs - and probably would have been the No. 1 concern had the nation not experienced a recent spike in oil prices.

"Many retailers have told us that the cost of interchange fees is more than they make in profit," said Michael Sansolo, senior vice president, FMI, noting that one operator pointed out that credit card fees are the fourth largest category on the expense side of its balance sheet.

Rich pointed out that retailers are prohibited from explaining the costs to their customers because of their contracts with Visa and MasterCard, but they are not able to view those entire contracts because Visa and MasterCard won't share them.

"We'd like to be able to educate our customers, but we can't," he said.

Retailers are especially upset that they have been unable to view the entire contracts that they have with their card issuers - a slimmed-down, but still complicated, version of the contracts is all they are given - despite repeated requests from Visa and MasterCard.

"The most disturbing part of this to me is the lack of transparency," said Rob Bartels, CEO of Martin's Super Markets, West Bend, Ind. "In order to become more efficient, it requires me understanding what those costs are, and I can't get in there and see what the algebra is.

"It doesn't make sense from a customer standpoint either. They see a lot of card offers, and they have no idea that what choices they make can raise costs."

The fact that these contracts are so complicated - with more than 150 different levels of charges, based on how a card is processed - also seems designed to prevent retailers from delving in more deeply to understand the problem, he said.

"The volume of material is clearly there to obfuscate the issue," he said.

Hammonds noted that customers who pay by cash or check end up sharing the financial burden in the form of higher prices because of the fees that retailers pay to accept payment cards.

"It gets built into the cost of goods, and there's no way to avoid that," he said. "Anyone who pays by cash or check is subsidizing the credit card companies."

In other countries, including Australia and the U.K., credit card issuers have been forced to cap their fees, but the U.S. government has yet to intervene.

"We want the government to do what other countries have done and take a look at that," he said. "The fees ought to be cost-based, and they ought to be fair."

Other issues that food retailers were concerned about were health care costs, at No. 3, and competition, at No. 4.

"The ability to provide the kind of health care benefits you want to provide is getting harder and harder to control," Sansolo said.

He said retailers' health care costs were up 8.7% in 2005, which represents a slight decline from recent trends, but are expected to return to double-digit rates of increase in 2006, to 10%.

Retailers Can Minimize Fees

CHICAGO - Retailers can minimize their interchange fees if they work carefully with their processors, two banking industry representatives from the processing side said during a session at the Food Marketing Institute show here last week.

"The most important thing anyone can do is to work very, very closely with their processor," said Patricia Lenti-Crane, vice president, Bank of America Merchant Services. "You should be able to pinpoint where the problems are."

She described an environment in which accuracy and timeliness in settling charges is paramount.

"Make sure your file is clean and does not have anything to hold it up," she said.

Failure to settle charges within 48 hours will bump up the interchange fees, she said, and a delay of 72 hours or more will add 100 basis points.

Interchange fees were about 1.58% of charges in 1998, she said, 1.75% of charges in 2004, and were expected to reach 1.86% of charges in 2010. Interchange fees are 95% of retailers' total credit card fees.

Lenti-Crane suggested that when supermarkets began accepting cards that charge a higher fee, such as American Express, they "indicated a certain threshold of pain" they were willing to tolerate, which she said gave Visa and MasterCard the incentive to begin boosting fees.

Electronic payments overtook cash last year as the No. 1 form of payment among U.S. consumers, she said, although supermarkets currently generate about 30% of their sales on credit and debit cards.

She agreed that the current schedule of fees can be overwhelming for retailers. Visa has 81 different levels of interchange fees, she said, and MasterCard has 71 different levels.

Lenti-Crane and Jamie Landheer, vice president, Fifth Third Processing Solutions, offered some advice for retailers attempting to minimize interchange fees:

Try to convert customers to debit cards, which have lower fees.

Make sure card readers are clean so that cards get swiped correctly every time.

Obtain reports of unmatched charges to pinpoint cashier fraud.

Look into issuing a co-branded credit card.

Be wary of commercial purchasing cards, as they carry higher fees.