If you ever had the opportunity to read this study by the Federal Reserve, you’d have a pretty good understanding of merchants, interchange, and the consumer impact. The study examines what happened to consumer prices after Dodd-Frank imposed debit interchange price controls. The short story, summarized on page 12, is: “little empirical evidence has been reported on the change of merchant prices due to the debit interchange regulation.”
Simply put- if you reduce interchange, the money goes into the merchant’s pocket, not the consumer’s wallet (or purse).
That is what makes the issue of credit card surcharging counterintuitive.Today’s WSJ offers an attention-grabbing headline as it shouts, “Paying with a Credit Card? That’s Going to Cost You.”
The article begins with:
- More small businesses—and even some larger ones—are charging shoppers a fee for credit-card purchases or offering them discounts when they pay with debit cards, cash, or checks.
- The moves are meant to offset the various fees businesses pay on credit-card transactions, costs that have grown alongside generous cash-back and travel rewards.
Surcharging is not the mainstay in payments today, but the concept is straightforward. As you settle your bill with a merchant, the merchant adds a fee on top of the purchase. In the example, WSJ offers, a $5 ice cream purchase adds 25 cents at the point of sale.
As a consumer, I’d steer away from a business that surcharges. It seems like a sleight of hand to raise consumer costs. The merchant already has an expense for handling cash, as they do with taking any payment form. They do not disclose the cost of goods sold at the point of sale. So why single out the processing cost? It has more to do with incrementing revenue than it does to reduce expenses.
If the credit card interchange was 1.75%, then the actual processing cost was closer to $0.09, a pittance compared to the merchant’s $0.25 upcharge. Moreover, if pricing included the total merchant fees associated with smaller merchants, closer to $0.66 fully loaded, that cost is not just interchange; it contains all other merchant services for statement rendition acceptance, capital equipment, and related expenses. That is an area regulators miss when they attack interchange. Payment networks set the interchange rates but do not earn revenue from the interchange. Also, processors add on fees to cover their risks, expenses, and margins.
Let’s use a more practical example.
At Fastfoodmenuprices.com, the cost of a large ice cream cone is $4.99 at Ben and Jerry’s. Add on a chocolate-dipped waffle cone, and that is another $1.49. Throw on sprinkles for another $0.29, and with tax, the ice cream cone is about $7.00. Just to put the revenue dynamics into the equation, this site says a commercial 3-gallon tub of ice cream is $30, and there are 55 four-ounce scoops in the container, with an average cost per scoop of $0.47. With a suggested markup of 333% to 416%, the merchant has plenty of margin to support their payment processing
When it comes to small businesses and credit card surcharging, the more significant issue seems that the consumer will not see the savings, but the merchant will benefit. Perhaps the broader point is that the mom-and-pop store will have to pay income taxes because the transaction is now documented in the credit card transaction and not presented as an anonymous cash transaction.
Either way, this is August and everyone loves ice cream. Many more than those who like credit card surcharging.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group