Merchants Going After Credit Card Processing Fees (V, MA)

Credit card processing fee legislation appears to be coming back.  Whether it becomes law is another matter, but merchants are going after credit card processing fees via a fight in Washington D.C.  That puts the likes of Visa, Inc. (NYSE: V) and MasterCard Incorporated (NYSE: MA) front and center due to roughly an 80% market share.  It could also pose a serious risk to a portion of revenue in their business models.  It seems that merchants are banding together again to fight the amount of money they have to pay for processing transaction payments on credit cards.

The National Grocers Association has spoken out on this and it appears that the National Retail Federation is trying to get additional provisions in the bills during mark up.  The House Financial Services Committee subcommittee (HR 627) and the Senate Banking Committee (S 414) are in mark up discussions this week according to data we have seen.

One of the provisions in the Senate bill directs the General Accounting Office to report on the disclosure of interchange fees, how such fees are regulated, costs and factors in interchange fees.   Also included is supposed to be the consequences of the undisclosed nature of interchange fees on merchants and consumers with regard to prices charged for goods and services.  We have been told that HR 627 doesn’t directly mention interchange fees, but it contains a provision to require the Fed to report on imposition of fees on merchants.  Whether that is the case may actually change back and forth depending on who ultimately crafts the final drafts.

This is not the first time this happened and credit card processors have their own defenders and lobbyists.  One thing that you can bet which will come front and center is how these fees help in the fight against credit card fraud and on how many cards can be issued.  This probably isn’t the last you’ve heard of legislation on this topic of credit card processing fees.

Interchange fees are an important source of revenue for banks and processors. The fees are taken on every single transaction that a customer uses a credit or debit card.  Then a cut is paid to card issuers from the merchant’s banking institution.  These vary by transaction type, which industry segment it is, and even from merchant to merchant in some cases, but generally these are 1.5% to 1.75% (and can be much higher) according to our own data and data we have seen.  As more and more transactions are going to plastic, you can imagine what has happened with the annual amount of these fees.  When you see market pundits pumping up the credit card processing companies (i.e., Visa and MasterCard), now you know why.

When sales at the retail level are dropping, a fee being cut goes straight to the bottom line of a retailer.  You could even take the argument that high fees in this area act as another hidden tax, and it seems a safe bet that more hidden taxes are already on the way.

Jon C. Ogg
March 31, 2009