May 24, 2006

Retailers explore alternative payment options to eliminate interchange fees

This month’s Progressive Grocer magazine cover story is titled, “Interchange fees: the tipping point”. The subtitle: “Fed up with out-of-control interchange fees, retailers are fighting back with concerted legal and educational tactics -- and, in some cases, proactive offensives of their own.”

The authors report that rate increases and higher customer usage have boosted interchange fees to the point where thay now exceed the average retailer's net profits.

"In our view the tipping point is when interchange fees begin to exceed the cost of doing business and the profitability of the stores,” says Thomas K. Zaucha, CEO of the National Grocers Association. "It reaches the point where you say, enough is enough."

Some retailers are taking the matter into their own hands. Zaucha says the retailer association is developing a national merchant-controlled credit and/or debit card of its own. "In our opinion it's critical to our overall strategy and ultimate success to develop an alternative payment system," says Zaucha.

Wal-Mart’s desire to have a bank and “save millions of dollars in fees each year as shoppers write checks and swipe credit and debit cards” is generating a great deal of concern from bankers that fear that Wal-Mart has bigger ambitions. Wal-Mart is also coming up with innovative ways for customers to pay without even using credit cards at all, through direct bank-account debit programs.

Interchange is definitely moving into the mainstream conscience. Fortune magazine’s most recent issue also addresses the subject in “Plastic under attack”:

"MasterCard and Visa have never been so besieged. The two competitors face mounting legal battles over the so-called interchange fees they charge retailers. Last year MasterCard's and Visa's member banks took in about $30 billion in revenues from interchange fees - about 75 percent of what merchants pay to accept credit and debit cards. Experts agree it's inevitable that the fees the card companies charge merchants will be slashed."

Adding payments made to other card brands, namely American Express and Discover, the total amount paid for interchange or equivalent services by US merchants was probably around $40 billion last year. That’s a huge industry which banks are attempting to protect entirely through legal action.

Without a major mind-shift in the payments industry, the future looks grim. Even if merchants lose out in courts (which is not the direction things have been heading) they will still find ways to set up alternative payment options and simply bypass banks and interchange fees for a large portion of transactions.

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