Thursday, July 28, 2011

The Unplanned and Unintended “Part Three” of the “Dollars and Sense” Series

I really didn’t plan on writing this when I started the “Dollars and Sense” posts a few days ago, but then I read this Yahoo News article (see link below) ...

Everybody knows how credit cards work  -  or do they?

So, to correct that apparent injustice, they’re rolling out a new merchant fee structure and introducing something called a “merchant participation fee”, the details of which are still sketchy at best.  We’ll have to wait until our credit card processor fills us in on the specifics.   

Chances are, no matter what they’re planning, it will cost us a whole lot more to accept and process customers’ credit cards.

But hey, it’s only fair.

After all, to keep it in perspective, VISA, with its earnings up by 40%,  just reported a third quarter NET income of ONE BILLION DOLLARS, which comes largely from the interest customers like you pay and also from the fees paid by merchants like me.

I figure now is as good a time as any to clue you in on how credit cards actually work – if you’re a merchant.

Sure, as a consumer, you already know how credit cards work.  The bank sends them to you.  You use them to buy stuff.  The credit card company/bank sends you a bill every month.  If you’ve racked up, say, $2500.00 in charges, they ask you to pay them at least about $26.00 for that month.  Part of that payment goes to repay a small part of the $2500.00 you owe them.  The rest is interest, which might be somewhere close to 25% a year.  Simple, right?  

And if you pay the monthly minimum and never charge anything else on that card ever again, you’ll pay off your $2500 debt in about … 23 years.

Then there’s all that great stuff the credit card company gives you for “free”, like the “points” that you can use to buy even more stuff.  Or apply toward airline miles. Or whatever.

I’ll bet you think that the credit card company is giving you those great points because they value your business, right?  They’re willing to dig down deep into their corporate pockets and forgo part of their income to keep you fat, loyal and happy, right?

Well, no, actually.  

Merchant fees – the fees that the credit card companies charge retailers – are the main source of the income that lets the credit card companies look like the “good guys.”  It doesn’t cost them anything.  Merchants pay for your “perks” through the fees that they pay to the credit card companies. And much as booksellers might like to pass part of those additional fees on to you, the customer  -  they can’t.

That’s because it’s the publishers who set the prices of books, publicize them and usually print them somewhere on the book. It’s well-nigh impossible to convince a customer that it’s a good idea for them to pay $22.50 for a book whose price of $21.99 is plainly printed by the publisher on the cover.   

Further, merchant contracts with the credit card companies explicitly state that customers can’t be charged any additional fees or higher prices when they use a credit card.  So, out of necessity, the bookseller/merchant absorbs the fee as a cost of doing business.  In pretty much every other part of the world of commerce, those little credit card fees get passed along in the form of slightly higher prices.

Not so with books or pre-priced book-like things.

Really – you didn’t actually think a big company like VISA was going to surrender any part of their 2011 ONE BILLION dollar third-quarter net profit just so you could get some frequent flier miles, did you?

(Yeah, that's right . . . a PROFIT of ONE BILLION DOLLARS in THREE MONTHS . . .)

Here’s the scoop – when you use your card to buy something, the merchant who accepts your card will pay a whole series of fees to the issuing credit card company.  The first fee is called the “discount rate”.  It’s a percentage of the total sale, sometimes as high as 5%, depending on the kind of business it is.  That’s because some kinds of businesses are considered by banks to be “riskier” than others and attract a class of “risky” customers who tend not to pay their bills.

The next fee is called the “interchange fee.”  This is a fee you’ve probably never heard of.  It’s usually a fixed amount plus a percentage of the total sale that gets split by the customer’s bank and the merchant’s bank. These fees are complex and vary by company size, geography and a number of business conditions.   

Then there are “batch processing fees” that a merchant pays.  Don’t forget the “minimum monthly fee”, for those months when sales are light.  And the “monthly statement fee.” There are several other “nickel and dime” fees as well. 

The merchant also pays the same fees on any sales tax that gets added on, even though that money gets sent to the state. That’s right – on a credit card sale, we actually pay a fee to banks to collect the sales tax that our customers owe to their state and local governments.

And, as a point of information – we don’t “charge” sales tax; we simply collect it, as the unpaid agent of state government.  We don’t have a choice in that.  We’d be in deep weeds if we didn’t.

For small businesses, all these seemingly tiny fees add up – often to as much as 7% – 10 % of the total sale.  

Now, the good folks at VISA are suggesting this is still not quite enough.

After all, the nice gentleman who is the VISA CEO only made $12,914,881.00 last year in salary, stock options and other goodies.  Apparently, he’s one of those “job creators” we keep hearing so much about lately. Apparently, they’re the ones who are taxed enough already and will start firing people if they have to pay a penny more.

By the way, there are a few other “interesting” pieces of credit card information you may never have heard of.

For example, merchants who accept credit cards cannot set a “credit card minimum” for purchases.  If a customer wants to use a card to buy a 50 cent item, the merchant is obliged by credit card company contract to accept the card for payment.  The merchant will then pay about 35 or 40 cents to “process” the 50 cent charge because of fixed minimum processing fees.  Merchants who put up “Minimum Credit Card Purchase - $25.00” signs are in violation of their contract.

Moreover, in states like New York, state law prohibits merchants from asking a customer for additional identification, like a driver’s license or a phone number. Merchants therefore must assume the risk that the card is neither stolen nor maxed out, since only the name of the customer – as it appears on the card - is known to them.  Neither MasterCard nor VISA will release the address or phone number of a deadbeat customer to a merchant; that would be a violation of credit card company policy.

So, we’ll just have to wait to see exactly what the “adjustments” that VISA has in store for us actually are. 

That’s what’s great about being a “really small business” – you’re the total master of your own destiny … maybe just like the "12.9 Million Dollar Man" at VISA.

The sarcasm is, of course, intended.

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