Priceless Merchant Fees

Fees to Visa and MasterCard per transaction: PRICELESS

It seems that MasterCard and Visa believe their brand and services are so valuable to merchants and that their market position is so dominant, that they can act like extorting monopolists when setting fees and policy.

Most consumers have no visibility to the complete business model and interworkings of the credit card industry, nor should they really need to IF the big boys and girls at the credit card companies were acting ethically.  For those consumers that do care to look into how the money flows behind the scenes on their typical credit card transaction I frankly think they would be in awe.

Visa and MasterCard are playing a dangerous game of “smoke and mirrors” and obfuscation with consumers, merchants and lawmakers. They are not only exploiting their dominance but also the obscure, complicated, and multi-party payer business model where they negotiate service contracts and prices on behalf of payers (the merchants) and these payers aren’t even at the table.  I consider myself a quick study on business models, usually able to quickly analyse the participants, money flows and leverage points, but when it comes to the “credit card game” I must admit it took me a lot longer than usual to finally figure it out…and I had a good reason to, as I am a merchant paying those fees.

The players and participants

Beyond the fees and interest consumers pay for receiving the benefits and credit services, there are a slew of fees paid by the merchant on every transaction.  On a $100 transaction, the merchant would typically net between $97 and $98, however, it is the lack of transparency and control with respect to the fees that is the problem, not the amount of the fee.  Herein lies the problem:  When a merchant accepts a particular card, they have absolutely no idea how much the fee is going to be.  From one transaction to the next, depending on the type of Visa or MasterCard that is presented at the point of sale, the fees paid by the merchant can vary dramatically.  It is only at the end of the month when the merchant receives their statement from the processor that they know the fees that were levied.  To make matters worse, even if the merchant knew how much the fees would be by specific card, the merchants is obligated to accept all cards, and they are also prevented from charging any premium or surcharge to the consumer for using a credit card.

So, on one hand, Visa and MasterCard can operate a brilliant money making scheme (scam?) where they make up the rates and surcharges and blindly and passively stick it to the merchants, but on the other hand, the merchant can’t have a published surcharge to those consumers wishing to use credit cards.  Of course, Visa and MasterCard say “merchants don’t have to accept credit cards” or “they can offer a discount for using cash”.  Both suggestions are a joke.  The vast majority of merchants cannot operate without accepting credit cards.  The reality is that Visa and MasterCard have a dominant position and credit cards are integral to most forms of commerce, so their arbitrary setting of unreasonable terms and policy is abusing their dominant position.  It really is that simple and the feds need to be on these guys/gals like white on rice before we get completely hosed.

 

How credit card companies and their customers work their back room deals

To really demonstrate the abuse one just needs to look at how credit card companies and their customers (the banks that issue the cards) cook up new products (new credit cards).

As you may have noticed there has been an onslaught of new specialty credit cards that offer attractive benefits including “free” air miles, cash back, and other rewards.  Where does the money come from to pay for all of these valuable rewards you ask?  Where else – the merchant – who strangely isn’t party to the negotiation of the contract that has their name as the payer.  For example, in 2008, Visa came up with a nifty new type of card called Visa Infinite that they convinced their customers to start promoting.  In some cases, consumers were issued the Infinite card automatically as a replacement.  While it didn’t cost the consumer any more to use this card, it definitely cost the merchant more. I call this the “conspiracy of infliction strategy”.  You see, Visa gets in a room with say CIBC card products people and they conspire to put Infinite cards in the hands of lots of consumers, knowing that those consumers will inflict those cards on retailers, and each time the card is used, the merchants will pay their regular fees plus a whole lot more back to CIBC and Visa. For example, on my merchant statement received from my processor (Global Payments) in June 2009, the fees I got dinged for accepting Infinite cards were some 50% higher than those for other Visa cards.  Think about that for a second.  Poof.  In a split second, Visa and their customers raised prices by 50%!, unbeknown to the merchant, the recipient of the price increase.

It is important to explain how the fees are divided up on the typical sale.  In the case of the $100 transaction mentioned above, the issuing bank (CIBC in this case) would get about 75% of the money or about $2.00 of the $3.00 total fee.  This is, of course, in addition to them getting the annual fees and interest too. Now, I am sure you
can see the incentive and leverage the issuers and Visa and MasterCard have in setting prices/fees.  They dream up bigger, better and more expensive offers and they get merchants to pay for them.  Nice eh? Please tell me what other industries operate this way? If there is one that operates ethically and transparently, I’m in.

 

Oh, of the remaining $1.00, the acquiring bank, processor and Visa itself split it up, with the majority of this going to the acquiring bank.  Of note is the fact that Visa itself carries no risk in the transaction, as they don’t advance funds or issue credit as that is handled totally by the issuing bank. Visa and MasterCard sit back and watch the profit meter rise while the risk meter goes down!