Here is an interesting read from Bloomberg that explains how retailers might push back on premium or elite reward cards. The basis for the story is interesting: should retailers have a say in credit card reward programs? The article calls out the Apple Card, but the merchant’s concern is broader.
“Premium plastic has become a flashpoint in negotiations between the country’s largest stores and the Visa and Mastercard networks.”
“This holiday season will be the first for the Apple Card, the highest-profile new credit card in years. And every time a customer waves an iPhone at the register to use the new card, a retailer may feel an extra pinch on its profits.”
“That’s because the card, marketed by Apple and backed by Goldman Sachs Group Inc., is designated “elite,” which allows it to levy significantly higher interchange fees on each swipe or tap. Those fees aren’t paid by the consumer but by the merchant as part of the cost of accepting credit cards. A grocer can lose more than half its profit on a sale when someone pays with an Apple Card, or one of its elite competitors, rather than a normal card. Elite cards impose higher transaction fees to support generous reward programs for their customers.”
The basis for the difference is that better qualified cardholders tend to have more money. With that tendency comes the ability to spend more at the point of sale. This should surprise nobody.
“Card networks tell merchants the higher costs are justified because premium cardholders also have more buying power—so they’ll spend more.”
“According to payment processor Auric, since January 2018, the average purchase made with premium-branded Visa cards was $50 higher than those made with regular Visa credit cards.”
“But the cards have long irked retailers.”
“They have no choice but to pay the higher fees for elite plastic if they want to accept any of a network’s credit cards.”
I have been watching the interchange issue for many decades. Something merchants often forget is that Mastercard and Visa, like American Express and Discover, are private payment networks. Issuers for each system accept the operational risk for accepting payments and extending credit. It is not cheap.
“Visa has regular Visa credit cards, higher-end Visa Signature branded cards, and top-level Visa Infinite cards, which charge stores the highest fees. A store can’t turn down, say, Infinite cards, and still take the others.”
“Mastercard, the Apple Card’s network, has a similar arrangement.”
“Merchants in the U.S. saw the costs tied to accepting electronic payments balloon to a record $108 billion in 2018, according to the Nilson Report.”
“Some of the increase can be attributed to the rise in the overall use of cards, but many stores also blame the profusion of high-end rewards cards.”
“According to a report from the Consumer Financial Protection Bureau, the share of credit card purchases made with any kind of rewards card rose steadily from 2015 to 2018 and is above 80%. (Some essential rewards cards don’t carry the extra transaction fees.)”
“If those rules were to change, consumers might face a more confusing situation at the checkout counter. Or it could just mean that stores would have more leverage to fight higher swipe fees and that the arms race for credit card rewards would start to cool off.”
Interchange remains one of the hottest issues in the payments business. In some markets, like Australia and Europe, regulators forced down rates with the promise of reduced prices. That strategy never worked out; consumers never saw the benefit, but merchant revenue rose. And, for U.S. consumers, have we seen price decreases since Dodd-Frank impemented debit card interchange constraints? Not here, in sunny, Florida, for cetain.
And what to do when the economy sours? During the Great Recession, more than $1 out of every $10 in credit card debt charged-off, much to the chagrin of credit card lenders. Top issuers saw billion-dollar losses. And with that, merchants had no liability.
It was the cost of doing business in credit cards.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group