Too Good to Be True?

Visa's interchange-fee adjustments have retailers suspicious

OAK BROOK, Ill. -- "Hallelujah" was one retailer's initial reaction to last week's announcement from Visa Inc. that it would make changes to reduce interchange fees for transactions at the pump. But that ecstatic optimism turned to aggravation upon further analysis. "My first reaction was 'hallelujah'," Greg Parker, president of The Parker Cos., a chain of 25 convenience stores based in Savannah, Ga., told CSP Daily News on Friday. "After working on the analysis, which is what my CFO has been doing for the past few hours, it's not pretty."

Last week, as reported in CSP Daily News, Visa [image-nocss] announced it would restructure consumer interchange for fuel purchases designed to lower interchange rates. Interchange for Visa debit cards would be capped at 95 cents per transaction, effective July 18, 2008, while interchange for Visa credit cards would be restructured into a single, yet-to-be-announced lower rate, effective October 2008.

Parker estimated that the breakeven on the new Visa credit-card offer is actually higher than the breakeven on the current average Visa credit-card transaction in his stores. "It's because they're charging more," he said. "What they're proposing makes things worse," he added. "So far, it looks very bad, and it will drive expenses up.… This does not fix the problem, and it's insulting to Congress, it's insulting to the retailer and it's insulting to the consumer."

Retailers desperately need relief from an expense that has become an insatiable drain on profitability. Last year, for example, the industry paid $7.6 billion in credit-card fees, according to NACS 2008 State of the Industry figures. That's a $1-billion increase over the prior year, while industry profits plummeted by $1.4 billion. Furthermore, opponents of interchange fees suggest a need for more transparency in such rates.

One retailer, who asked to remain anonymous, needed more time to analyze how the interchange adjustments would affect his company's bottom line, but suggested the move was merely a "publicity play" on Visa's behalf.

Bill Douglass, CEO of Douglass Distributing Co., a 15-store retailer based in Sherman, Texas, meanwhile, admitted to having "a jaundiced view" of the announcement. "As a retailer, you're always skeptical because Visa and MasterCard play these clever games to drive a wedge between us and the banks or the oil companies or the other groups," he said. "I'm skeptical there's any net savings in what they announced between changing the fee and changing the percentage.… It's encouraging to see they recognize they have an issue, but that's the only encouraging part. Until they tell us the rules, we don't know what we have."

According to Visa's announcement, the changes arose from the need to provide "an exceptional response" to unprecedented fuel prices even though "interchange rates on fuel transactions are already among the lowest in our system," as Visa global head of corporate strategy and business development Bill Sheedy said in last week's release. A Visa spokesperson confirmed that the changes apply to Visa consumer debit and Visa consumer credit cards, though there "might be some exceptions," such as prepaid cards.

Most retailers and their constituents fully dismiss the idea that credit-card companies have retailers' or consumers' interests in mind. NACS spokesperson Jeff Lenard equated Visa's rate-change announcement to a "PR stunt" designed to further muddy the waters. "They point out that rates at the pump are the lowest in the system," said Lenard. "I don't know what system they're talking about, but U.S. interchange fees are the highest of any industrialized nation.… Visa has publicly acknowledged that interchange fees are outrageous and are a problem. They've done nothing to address what that problem is.… It's likely that retailers will pay the same or more."

He added, "This does nothing to change the broken system. Retailers have no more ability to write the rules than they did [before Visa issued its news release last week].… I think this announcement doesn't change the basic problem in that credit-card companies are allowed to write rules that fix prices in secrecy."

Leading up to the October deadline, Visa said it would be willing to work with fuel merchants individually to process transactions at these lower rates. A Visa spokesperson said merchants should contact whichever entity helps them accept credit cards, such as a financial institution or a processor. These entities, in turn, will work directly with Visa to apply the negotiated changes ahead of schedule.

Some suggested Visa's move would spur rival MasterCard to respond with similar adjustments of its own, but it is unclear whether that will happen. A MasterCard spokesperson indicated the company is already doing its part to ease the burden on retailers. "MasterCard heard gasoline dealers' concerns about fees on rapidly rising gasoline prices and responded," Tristan Jordan, MasterCard's business leader, U.S. region communications, wrote to CSP Daily News in an e-mail. "MasterCard has given relief at the gas pump by capping interchange fees on fuel purchases. MasterCard's cap on interchange fees, which has been in effect since April 2007, applies to MasterCard consumer credit and debit fuel transactions of about $50 or more."

Despite such responses, industry proponents plan to continue taking the fight to the credit-card companies. On Friday, for example, NACS announced it was launching a grassroots campaign to shed light on the interchange issue by distributing specially designed pumptoppers to retailers free of charge. These pumptoppers communicate the industry's fight against high interchange rates and call upon consumers to ask members of Congress to support the Credit Card Fair Fee Act. NACS is urging retailers to put these pumptoppers in their promotional signage plans from August 1 to September 6, when Congress is in recess and members will be in their home districts.

"None of this is a win in that the system is still broken," said NACS' Lenard. "But the positive is [the credit-card companies] have stated that this is a problem."