Credit card interchange fees spark disputes among small business merchants
An Eat'n Park customer is almost as likely to pull out a plastic card as a paper bill these days to settle up with the cashier after a meal.
Credit and debit card payments have risen sharply in recent years and now make up 35 percent of total sales at the restaurant chain, said Dan Wilson, chief financial officer at Homestead-based Eat'n Park Hospitality Group.
"It's clearly a convenience factor that our customers want," though Eat'n Park and other businesses nationwide worry about the mounting "interchange" fees they pay on card transactions and their effect on prices, he said.
Lobbying efforts by retailers' groups have persuaded Congressional leaders to be concerned, too, about the fees' growing impact on prices for consumers and whether they truly reflect the costs and risks of transactions.
A typical American family pays more than $300 a year in interchange fees, as a result of merchants passing on their own costs, the Merchants Payment Coalition said. All told, Visa and MasterCard took in more than $36 billion in interchange fees in 2006, more than double the figure from five years earlier.
For now, though, let's return to that Eat'n Park diner paying an average bill of $25 for three to four meals.
Say a credit card is used. Eat'n Park has to pay the card provider -- such as Visa or MasterCard -- an interchange fee of 45 cents or just under 2 percent, plus a flat fee of about 10 cents.
"The confounding thing is that the majority of that is something we can't negotiate," Wilson said, and the privately held chain of 80 family-style restaurants can't raise prices much without alienating customers.
He'd like to know exactly what the fees pay for and wants to see better rates, considering Eat'n Park's ever-increasing payment volumes.
As merchants have watched interchange fees rise from an average 1.5 percent to around 2 percent in the past five years or so, they've tried to enlist consumers, courts and political leaders in their campaign for changes.
The U.S. Senate's Banking, Housing and Urban Affairs Committee plans a hearing this year on interchange practices, while the Senate Homeland Security and Government Affairs Committee may take it up as part of a look at alleged abuses in credit industry practices.
Legislation has been introduced in nine states to control the fees or fully disclose what they are paying for, said the Merchants Payment Coalition, which runs the Web site UnfairCreditCardFees.com . Pennsylvania isn't one of them -- the state doesn't regulate the fees and Department of Banking representatives said they don't know of any legislative effort to do so.
Fueling the interchange issue nationwide are rising rates to pay for rewards and premium credit card programs.
Those programs benefit the network such as MasterCard, and the card issuer such as a big retailer or airline that offers tempting discounts or frequent flier miles to make more sales. But merchants where customers actually swipe the cards often feel they're paying interchange fees and not seeing much benefit.
"MasterCard did a study that said having a credit card with rewards increases spending," said Jeff Lenard, spokesman for the National Association of Convenience Stores, "but in our industry somebody is not going to say, 'Let's buy six tanks of gas.'"
About 65 percent of consumers now pay for gas with plastic, an upswing largely due to higher prices and pay-before-you-pump rules.
Thin profit margins for gas station/convenience store owners meant that last year, the credit card industry made more money -- about $6.6 billion in total fees -- than the member businesses themselves did on sales, Lenard said.
Interchange fees vary, and are adjusted twice each year, And generally, merchants' fees are higher for credit transactions than for debit sales where a customer uses a personal identification number.
MasterCard and Visa control about 80 percent of the credit card industry and overall, the card networks say the fees are necessary to cover transaction processing, security, rewards and business innovation.
Some merchants aren't inclined to challenge them, and shrug off the fees as a necessary business expense.
Goodwill Industries of Pittsburgh pays an average $12,000 a month in fees related to credit and debit sales at its 24 stores and auto auction in North Huntingdon, Westmoreland County. Sales last year totaled $17.5 million.
"We recently added the credit card service to the auto auction," Goodwill spokeswoman Sheila Holt said. "Our customers were clamoring for it because they didn't want to carry cash. That is a large purchase."
Consumers, too, appear to be reacting to the interchange fee issue with shrugs and a good bit of skepticism.
Most know about the fees and believe they affect prices, according to a new survey by Javelin Strategy & Research. But they won't refrain from using plastic cards to lower a merchant's costs, and don't trust stores to share any reductions in interchange fees with them.
"Interchange is a market issue, not a moral issue," senior analyst Bruce Cundiff observed.
That's not to say consumers side with the credit card networks. "The fees they charge the stores are ridiculous," Rosemarie Sheerin, of West Deer, said as she bought a pair of walking sandals at Gordon's Shoes at The Waterfront in Homestead. "A lot of smaller businesses, they can't even have credit card services."
Store owner Chuck Gordon said he works through the National Shoe Retailers Association, a trade group, to try to keep card processing costs under control.
"If you take credit cards, that is an issue you are faced with and it is up to you as a business to negotiate the best possible situation," he said.
- is a fee structure on credit and debit card purchases that is paid by merchants,
- typically represents about 2 percent of the total transaction, plus a flat fee of 10 cents or more,
- costs a typical American family $300 a year, because stores and restaurants pass on their costs, the Merchants Payment Coalition said.