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Credit Not Debit Fees Hurt Retail Profits

Published June 15, 2010


GIG HARBOR, WA—Debit cards, credit cards, rewards cards—to the consumer the type of plastic they use to make purchases isn’t a life-changing decision. But to some retailers that choice significantly affects their bottom line since transaction fees vary widely between each of them.

Retailers are seeing heftier fees associated with credit card purchases, andmore specifically reward cards, on their bank statements.

Debit card transactions typically require a low, flat fee, they say, which is why most seemed unfazed by the Senate’s recent move to impose price controls on debit transactions.

“I was surprised they didn’t address credit card fees,” said Dmitri Keating, co-owner of Old Town Bicycle in Gig Harbor, Washington. “The bank wants everyone to run it as a credit card.”

At Keating’s shop, a credit card purchase costs 2 to 3 percent per transaction, while debit costs 25 cents. Keating tells his staff to run all transactions over $30 as debit and under $30 as credit to minimize the amount the shop has to fork over to the bank per transaction.

Randy McGhie, owner of McGhie’s Ski and Bike in Las Vegas, said his credit card rates per transaction are pretty reasonable at 1.5 percent to 1.8 percent. This is largely due to McGhie’s good relationship with his bank and the fact that his business moves a high volume of product.

But even with low credit card fees, McGhie tells his staff to “always push the debit.”

It’s the small retailer that feels the biggest impact from credit and reward card fees. Multiple store chains or stores that sell a high volume of product are rewarded with lower transaction fees.

“The little guy is getting screwed,” said Ron Schmid, manager of Michigan’s Fraser Bicycle. “I think it definitely hurts them a lot more. The big guys (that do a high volume) get the big break.”

Though shop owners would have preferred Washington legislators address credit card fees, which are higher than the flat fee associated with debit card transactions, of even bigger concern are rewards and corporate cards.

For retailers like Russ Murphy, owner of Mesa Cycles in St. Louis, Missouri, fees associated with consumer kickback cards are two to three times higher than normal credit card transaction rates. Sometimes they can reach as high as 8 percent.

“We try to be conscious of those cards,” Murphy said. “I just recently started seeing these cards with more regularity.”

But, Murphy said, it’s a slippery slope for retailers to try to steer customers into using a certain card. “There’s the potential to rub people the wrong way,” Murphy said.

Duane Kinsley, owner of Sport Systems in Albuquerque, New Mexico, understands why consumers prefer to use reward cards, but doesn’t think they fully understand how those rewards factor into the final price of goods.

“Consumers think they’re getting that 1 percent back” on their cards, but the retailer has to mark up items because of it, so it ends up being a wash for the consumer, Kinsley said. “Where are we losing the battle? This is one of them,” he said.

Kinsley wishes he could get a couple more points of margin from suppliers to offset rewards card fees.

Fred Clements, executive director of the National Bicycle Dealers Association, said rewards cards are a win-win for consumers and banks but at the expense of the retailer.

“Why should the retailer pay more so a consumer can enjoy perks?” Clements said about rewards cards. “From the consumer perspective, it’s nice to get something for nothing. For the banks, they get to offer perks as a marketing hook. For the retailer, they really get nothing other than the ability to process a transaction.”

Over the years Clements said retailers have voiced more frustration over the lack of transparency on fees than the costs associated with processing cards.

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