Published on March 2, 2010

swiped_1*Credit card interchange and processing fees are pulling money out of retailers’ pockets. What can you do to avoid getting taken?*

The guy said he could save them a ton of money. We’ll just call him Mr. X. Earlier this year, Mr. X called upon Bob Sickles, owner of Sickles Market, a gourmet grocery store and garden center in Little Silver, N.J. Mr. X assured him that he could save the business 30 percent on credit card processing fees. Sickles was understandably skeptical, but decided to hear him out.

The next day, Mr. X arrived right on time to deliver his pitch. He met with Sickles’ seasoned controller. She pointed out numerous flaws in his written quote, which wily Mr. X ultimately wouldn’t let them keep. After he departed, Sickles and his team did some additional digging online and found several bad reviews of X’s service.

“Needless to say it was a waste of time,” Sickles said. “I can hardly believe I fell for it, but these people will say and do anything to get the account. They have no scruples whatsoever. Unfortunately, I feel there are a lot of them out there—it’s so easy to rip people off this way.”

**Armed for Battle**

Experience taught the folks at Sickles Market to go into the meeting with Mr. X armed with the right questions. As the saying goes—once burned, twice shy. Sickles learned the hard way how a friendly credit card-service wholesaler can quickly become combative once a retailer starts asking questions.

Eight years ago, Sickles noticed something fishy on his processing statement. It seemed like his fees were on an endless upward trajectory. Something was definitely amiss. Sickles watched as the ratio of payments to the processor went up in a way that didn’t jive with the store’s revenue and credit card transactions. It turned out he was caught in a web of fine print. Hidden fees and surcharges were beginning to take a toll on his bottom line. And there was nothing he could do about it. Sickles ended up losing $11,000 as he remained stuck in the processing contract.

“Generally small retailers find this out when there is a slowdown in revenue growth, but their monthly fees keep going up—and the reality that they are getting hosed sinks in,” he said. “It takes a very good numbers person to figure this out. Many ordinary bookkeepers cannot figure it out, or want to spend the time doing it.”

Once Sickles Market was free to shop around for a new provider, they went with Heartland Payment Systems, a company they’ve been very pleased with.

“But,” Sickles added, “we still check our statements constantly.”

**Fee Nomenclature**

Dissecting a processing-fee statement is a tiresome exercise. Retailers often have to dig deep to figure out exactly what they’re being charged and why. It seems like a lot of work to save a few pennies. But as more consumers turn to plastic for payments, these pennies become a significant cost of doing business.

Don Wilczynski, a sales manager for Radiant Payments, has seen this first hand. Wilczynski works closely with Radiant Systems, a point-of-sale provider that frequently serves garden centers.

“The savings are definitely worth it,” he said. “In today’s economy, never underestimate 10 percent, 20 percent or more in savings for your business. In this day where people are trying to reduce their fixed expenses, a company needs to make a solid business decision to save money.”

Before you can discern the savings to be had, you have to familiarize yourself with the language of credit card processing. Wilczynski said the elements that make up fees fall into two categories: uncontrollable and controllable.

The costs of interchange and assessments are out of a retailer’s direct control. Interchange is the cost for authorizing and settling card transactions. This money goes to the card-issuing bank. Assessments are the costs you incur for accepting cards with Visa and MasterCard logos. Essentially these funds go into Visa and MasterCard’s marketing coffers.

Retailers can exert some influence over margin—the markup by processors to cover internal costs, credit underwriting and risk/profit. This doesn’t manifest itself as a singular, straightforward fee retailers have to pony up. Merchants typically have to plow through their processing statement and decipher the purpose of the various charges that show up there.

**The Hunt Begins**

Wilczynski said there are several fees retailers should watch for and closely scrutinize.

**Enhanced Billback. ** This surcharge is tacked on to non-swiped transactions to cover the extra risk processors take on for a less-secure transaction. It’s generally avoidable when retailers are set up with an interchange-plus program. (The cost that a retailer’s merchant account provider gets charged by Visa and MasterCard, plus a markup for services).

**Batch Fees. ** Some processors assess a fee when charges are settled at night. It’s often equated to the per-item fee some banks will charge when deposits are made. If it’s nominal, it’s not worth worrying about.

**Transaction Fees.** These are often seen in interchange-plus processing structure. They’re generally OK as long as the effective rate stays in line with the transaction. (Fees in the 15 to 25 cent range fall in this safe zone.)

**Monthly Service Fees. ** A reasonable range, according to Wilczynski, is $4.95 to $19.00. If it exceeds $10, retailers ought to be getting some “extras” out of the deal, like terminal warranties, free machine supplies and access to online account statements.

**Annual Compliance Fees.** This fee has been adopted by more companies over the past few years. This charge leaves Wilczynski scratching his head. It seems valid if a processor has just undergone some big infrastructure upgrade that improves customer service. But otherwise, it’s questionable.

“You just need to take a hard look and say, ‘What’s it for?’” Wilczynski said. “I can promise you not every processor charges that fee. Just know that it could be a profit opportunity for the processor. It could be legitimate. You just need to do more investigation.”

**PCI Compliance Fee. ** This is another fee that recently cropped up. Some processors are charging a monthly, recurring fee unless you submit a form confirming your card terminal or point-of-sale system is payment card industry (PCI) compliant. Essentially you’re providing a piece of paper certifying your system is a safe and secure environment for card processing.

But beware if you’re using a smaller processor. Wilczynski said some smaller companies are using PCI compliance as a standard fee that can’t be eliminated. “That, I would say, is a little bit excessive,” he said.

**Network Access Charges. ** This relatively new fee is levied by Visa and MasterCard for just being a part of the card-acceptance network. It’s a tenth of a penny per transaction. Wilczynski said if the network access charge that appears on your statement exceeds a penny, you need to ask questions.

**Club Fees. ** This charge can be tacked on for a variety of extra services, including terminal warranties. If the processor’s customer service rep can’t give you a clear accounting of what’s included in the fee, you need to dig deeper and try to get it eliminated.

**Out-of-Control Interchange**

Feeling nickel and dimed yet? Remember, all these fees are above and beyond interchange—one of the “uncontrollable” fees retailers shell out each and every time they accept plastic. Interchange fees levied by Visa and MasterCard average close to 2 percent per transaction—among the highest rates in the industrial world.

According to the National Retail Federation (NRF), interchange collections totaled $48 billion in 2008, up from $16.6 billion when NRF started tracking fees in 2001. The organization contends that Visa and MasterCard effectively force merchants to pass fees on to consumers by requiring them to be included in the advertised price of merchandise and making cash discounts difficult.

Retailers were hoping some relief would come from The Credit Card Accountability, Responsibility and Disclosure Act of 2009, that was signed into law by President Obama on May 22. An amendment to the bill had been introduced that would place more oversight and restrictions on interchange fees. But these measures didn’t make it into the final bill signed by the president.

Instead, the act included a provision requiring the Government Accountability Office (GAO) to conduct a study of how interchange drives up retail prices, why the card industry refuses to disclose fees to consumers and how card companies keep retailers from offering cash discounts, among other issues.

“We expect the GAO to do a serious study that will reveal the negative impact of interchange on the U.S. economy,” said NRF senior vice president and general counsel Mallory Duncan in a written statement. “The debate over interchange that occurred as Congress considered the Credit Card Reform Bill helped shine a spotlight on this issue and make more members of Congress and the public aware of how much the card industry is making off these fees. Congress can’t claim to have fixed credit cards without addressing interchange, but they are clearly on the path to finishing the job.”

In the meantime, some lawmakers continue to press the issue. In early June, House Judiciary Committee Chairman John Conyers, D-Mich., introduced H.R. 2695, the Credit Card Fair Fee Act of 2009. The measure is similar to the version of the bill that was approved by the committee in July 2008, and would require Visa and MasterCard banks to negotiate with merchants on interchange fees. *(as of 11/30/09 the bills mentioned in this article are still in committee)*

“This legislation will give merchants a seat at the table in the determination of these fees,” said Conyers in a statement. “It is not an attempt at regulating the industry and does not mandate any particular outcome. The bill simply enhances competition by allowing merchants to negotiate with the dominant banks for the terms and rates of the fees.”

In the coming months, retailers will see if this bill makes headway—or dies in committee. Bob Sickles is taking a wait-and-see approach.

“The credit card industry is bad because it is non-competitive, and the government should get more involved,” he said. “You’ll notice the big retailers are able to negotiate special deals. It’s the smaller operations that lose out.”

**Take a Look Twice a Year**

Don Wilczynski, a sales manager for Radiant Payments, encourages his customers to closely scrutinize processing statements in May and November—when the typical twice-yearly interchange fee increases are first reflected on paper.

“I strongly encourage the merchants on call to be proactive,” he said. “It is their business, and the best advice I can provide is to be proactive with your money. Most processors do not like attrition and will work with their client to ensure the rates are fair.

“This is the primary reason I encourage interchange-plus pricing. You know where the processor margins are, and you eliminate the guesswork associated with your rates. The only work you have to do during this time of year is to verify what interchange levels have changed and the impact, if any, it will have on their business.”

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