There is huge variation in the credit card industry for charges to process the different brands of credit and debit cards that are in existence. I refer to brands such as MasterCard, Visa, American Express, Diners Club etc., and make reference to the fact that even within each brand there are significantly varying charges.
For example it will cost much less for a merchant to process a “personal” MasterCard as opposed to a “World” or “Signia” branded premium MasterCard. According to the leading UK provider of merchant services Streamline, they will attract a whopping 0.6% higher transaction processing charge, despite the fact that to all intents and purposes it is still an ordinary consumer credit card.
I do not propose to comment on the rights or wrongs of this in this blog, as there are parallels in other industries. For example it usually costs significantly more for any consumer to make a phone call to the “3” mobile phone network in the UK due to their significantly higher “termination” charges, and in the end it should just be a simple question of supply and demand.
Rather, the purpose of my ramblings today are to highlight the issue and make reference to further reading and articles, and then my objective is to allude to how merchants can help to ensure that Adam Smith’s invisible hand may be allowed to work effectively. In other words, to allow the forces of supply and demand to come into play effectively.
Firstly it is useful to get the merchant banks’ position on the subject. Streamline is pretty transparent on their web-site as to what they charge, but not surprisingly they just blame it on the credit card companies and their pricing policies. They also mention “interchange” fees, a slightly controversial charge that has come under much scrutiny in recent years, and it is frankly quite difficult to get to the bottom of exactly how it is justified and what it is for.
But put simply, it is yet another charge levied by the card issuing bank to the acquiring bank for the privilege of processing their cards. If you wish to read more go to Streamline’s web-site by clicking here and Wikipedia has a useful article on Interchange which you can read by clicking here.
My take on it is that when you have so many rather friendly parties involved in facilitating a fairly vital function in our economy, namely the exchange of money for goods and services, they can charge pretty much whatever they want, for whatever they want, and call it whatever they want. The process is more transparent than it was and competition is certainly on the rise, but it is still very difficult for the average retailer to take on the banks and reduce their processing costs, without simply playing one merchant services provider off against another.
This is because typically, a merchant will be using ONE merchant services provider to process transactions for ALL card providers, so it is virtually impossible for the retailer to force the merchant services provider to lower the cost of processing specific cards. A level of “protection”, if you will.
One of the main problems for merchants here is the rising trend for the use of corporate cards and cards with membership benefits. And it is impossible to blame the consumer. If a card issuer offers major membership benefits to card-holders, such as discount vouchers or even subsidised tickets to major sporting events, consumers will to be attracted to that brand of card, and rightly so.
It is probably not going to cost the consumer any more to use the card, and then all the issuing bank has to do is charge the weakest link in the chain, the merchant (via the merchant services provider), a premium for the “privilege” of processing the transaction which more than covers the costs of offering the associated consumer benefits.
But what is the benefit to the merchant? Absolutely none. And moreover it is extremely difficult for any retailer to refuse to process, or even to implement a surcharge to process, specific branded cards because of their logo.
The reality in the short-term is that there is probably very little that a merchant can do to stop being charged premium rates for premium cards today. But as always, knowledge is power, and only by highlighting and becoming aware of the issue will the big players be inconvenienced enough in order to change their ways, or will the regulator possibly intervene for something that is blatantly anti-competitive.
To draw a parallel again in the telecommunications industry, think of the backlash against premium 0870, 0871 and 0845 numbers. Although the dynamics of the situation in the Telco industry I think were much easier to tackle (just find out the underlying geographic number using a site like “saynoto0870” and call that), it is only a matter of time before retailers kick up a stink about paying directly for the privilege of making card companies more money, with absolutely no benefit to them.
There are measures that I believe that can be taken by merchants, but they are outside the objective of this article. Of course I would be delighted to discuss them though if you wish to comment or make contact, simply use the contact form on this web-site. But the most important thing is to be aware of such charges, keep an eye on them, and make sure you are aware on a daily basis if your business is starting to process more premium cards, as only then can you take some sort of action to deal with the problem.