RETAIL VIEW: Retailers protest skyrocketing transaction fees
- by Tim Linden | March 16, 2005
In what has to be labeled pure irony, the Food Marketing Institute, on behalf of the nation?s food retailers, is protesting skyrocketing electronic transaction fees which it claims retailers have no control over nor any say in determining the size of that charge levied by banks and credit card companies.
Bill Greer, director of editorial services for FMI, the national trade association for food retailers, said that these charges are going up on a continual basis and they threaten the very profitability of the supermarket industry. He said that the charges can be as high as 2 percent per transaction.
?For an industry that operates on a 1 percent profit margin, the problem is obvious," Mr. Greer said.
Reinforcing that point, Mr. Greer said that FMI would be releasing its annual financial review for fiscal 2004 for the supermarket industry. He said it reveals that net after-tax profit for food retailers dropped to 0.88 percent last year, down from 0.95 percent in 2003.
He noted that the industry clearly does not have the profit margin built in to continue to pay increasing fees. "This industry was built on a large profit margin. We make our money on volume."
For years, the supermarket industry has found itself on the defensive end when suppliers make similar claims about their profitability. Suppliers, including many in the produce industry, have complained loudly that retailers often unilaterally impose charges ranging from slotting fees to ad allowances to grand opening credits that the supplier has no control over. The produce industry, in fact, has taken its case to Congress seeking some unspecified relief.
The retail industry is now in the same boat. Mr. Greer agreed that there is no ready cure for the problem, but he said that FMI has brought the issue to Congress. In fact, last fall, John J. Motley III, FMI?s senior vice president of government and public affairs, testified before the House Subcommittee on Financial Institutions & Consumer Credit, arguing that something must be done. The FMI executive told Congress, "The cost of electronic payments is one of the fastest-growing and least controllable costs of doing business."
He said that there had been 11 credit/debit rate increases in the previous 12 months.
Mr. Greer told The Produce News
March 9 that Visa was instituting another huge increase on April 1. He said that the rates most food retailers will pay for debit signature card transactions will jump from 1.24 percent plus 5 cents per transaction to 1.65 percent plus 10 cents per transaction.
Industry research has shown that the average credit/debit card purchase at a supermarket is $40, meaning the transaction fee will increase from about 54 cents to 76 cents on that size purchase. "Multiply that times the millions of transactions, and it is very significant," he said.
Mr. Greer said that transaction fees levied by banks and credit cards on all retailers are estimated to be about $30 billion per year, and they are rising each year. According to Mr. Greer, retailers are most concerned because this is "an anticompetitive fee? and an "uncontrollable cost? that, by its basic design, means it will increase even more in the future unless there is some type of intervention.
He explained that the credit card companies pitch their services to banks by promising higher fees. For example, a bank is wooed by MasterCard by the promise that the retailer transaction fees " payable to the bank " is higher than its competitors. The credit card competitor then must match that fee or take it even higher still.
?Retailers have nothing to say about it," he complained. While FMI is not sure what to do about it, Mr. Greer said that a number of different remedies are being discussed. He said the European Union, the United Kingdom, Japan, Australia and other countries have attacked the problem through the use of fee caps. Australia recently put a 0.5 percent cap on credit card fees, which reduced the fee from its previous average of 0.95 percent. Mr. Greer said the European Union recently put a 0.7 percent cap on the fees paid for cross-border credit card purchases.
He said that FMI would look favorably on similar action from the U.S. government. The Federal Reserve Bank might also enter the fray and establish transaction rules as it has with checks. While banks can charge a transaction fee for checks, Mr. Greer said that the fee is tied to the cost of handling that transaction, and it is much lower than the fees associated with plastic cards.
In his congressional testimony, Mr. Motley of FMI said, "Legislative bodies and regulatory agencies around the world have been examining the impact of these fees on consumers and consumer prices and exploring methods of regulating these growing fees. Several countries, including the United Kingdom, Australia, Israel and the European Union, have initiated actions such as caps on fees, changes in operating rules, antitrust/fair trade investigations, regulation of the allowed components of fees, studies and legislation. With fees that are higher than any of these international competitors, U.S. merchants and U.S. consumers are at a competitive disadvantage unless similar actions are considered in this country."
While FMI is poised to do something about the situation, Mr. Greer said that just getting their arms around the problem has been difficult because of the confusing fee structure established by the banking institutions.
?There are three types of transactions: credit cards, debit cards that require signatures and debit cards that require a PIN," he said. "Each has a different fee structure and there are different fees depending upon how large you are."
He said that transactions involving a debit card with a PIN are the most secure and the least expensive, but those charges are also increasing exponentially. "In 1994, the typical debit with PIN transaction cost eight cents. In 2004, the average PIN transaction cost 25 cents. In 2005, the fees will range from 17 cents to 50 cents depending upon the card and the size of the retailer."
The different tiers for different retailers is another issue that causes concern. Obviously not all retailers are treated alike, with the largest retailers getting a break on their transaction fees. Picking one sample rate sheet, Mr. Greer said that the largest retailers paid about 7 percent less than the smallest retailers. "It has been our experience that only a few retailers qualify for the lowest rate. Most of our members are in the highest rate category."
Mr. Greer said that FMI?s current effort is designed to shine a light on this issue so that Congress, consumers and suppliers see how expensive it is to do business. He said that there is also a security issue involved as the United States shifts to a plastic society. Most troublesome to retailers is the signature debit card, which costs the most to process and is the least secure, according to the FMI executive.
He said that many retailers are considering individual options, including issuing their own credit cards and encouraging consumers to use the least expensive PIN debit card.