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How Much Should Merchants Pay for Processing Card Payments?

Posted by Brandes Elitch | Fri, Jun 24, 2016 @ 07:00 PM

Recently, The Home Depot Inc. filed an antitrust lawsuit against Visa and MasterCard. It contends that the card brands colluded to prevent adoption of new chip-based cards requiring consumers to authorize transactions by entering personal identification numbers (PIN). In adopting EMV chip cards, Visa pushed for a signature authorization while MasterCard and the other brands advocated PIN authorizations. The Visa approach to processing card payments prevailed.

processing card paymentsAccording to The Home Depot, “Visa and MasterCard knew perfectly well that a signature alone, without the additional step of requiring a PIN, provides virtually no protection against many types of payment card fraud. Visa and MasterCard refused to prioritize PIN authentication despite requests from consumers, merchants, and regulators, and guidance from independent studies and think tanks.”

As a result, merchants such as The Home Depot pay fraud-related costs that are “unrivaled in the rest of the industrial world.”

Furthermore, The Home Depot is asking the court to terminate Visa’s Fixed Acquirer Network Fee (FANF). The suit alleges that Visa and MasterCard engaged in price-fixing and conspiring with major-issuing banks not to compete in the general purpose credit-and-debit-card network space. It also states that the networks have restrictive acceptance runes and set “supracompetitive” interchange rates, thus violating the Federal Sherman Act and various state competition laws.

Last year, The Home Depot paid around $750 million to accept bank cards.

Other Litigation Against Visa

The Home Depot suit comes one month after Wal-Mart sued Visa for the right to choose how customers authorize debit-card purchases. Wal-Mart wants consumers to use a PIN in their stores, but Visa offers consumers a choice between a PIN and a signature. (Most consumers are unaware that card-issuing banks collect higher merchant fees for signature based credit card transactions than for PIN based ones.)

This suit also states that card brands have engaged in price-fixing which prevents competition for merchants processing card payments.

In 2012, The Home Depot and most large retailers elected to keep their options open by opting out of a settlement that addressed many of the same issues with the card brands. In that case, the card brands offered to resolve the case for $7.25 billion with the proviso that the settlement would put a stop to future suits alleging price fixing and/or restraint of trade.

At the same time, Wal-Mart announced that it would no longer accept Visa cards in its 400 Canadian stores. Wal-Mart Canada pays about $78 million to accept credit cards annually. In 2014, after two years of interchange increases totaling 25%, Visa and MasterCard voluntarily agreed to cap interchange at 1.5% until 2019.

Card Revenue

Even payment professionals are often not clear on how Visa makes money, so here is a brief explanation with revenues from Visa’s 2015 fiscal year:

  • Service revenues: $6.3 billion
  • Data processing revenues: $5.6 billion
  • International transaction revenues: $4.1 billion
  • Client incentives (contra account): -$2.9 billion

Visa does not make money from the merchant discount fee; that is split unevenly between the issuing and acquiring banks of the transaction.

Visa’s FY 2015 pretax operating revenue was $13.9 billion less $4.8 billion in operating expenses, resulting in an operating profit of $9.1 billion and an operating margin of 65.3%. The after-tax net profit was $6.3 billion with a net margin of 45.6%.

This extraordinary performance is virtually unrivaled in any industry within the normal competitive landscape. Combined with interchange rates that are significantly higher in the U.S. than in the rest of the world, the results are leading to increased merchant dissatisfaction with credit card payments.

Viable Alternatives to Processing Card Payments

Now let’s contrast this with what it costs a merchant to get payment guarantee from CrossCheck. Typically, this is about one-third to one-half the cost of processing card payments. Of course, the reason merchants like cards is because once they get an authorization, particularly in a card present environment, and assuming they have an EMV terminal, they do not have to worry about a chargeback.

Nevertheless, the same is true with CrossCheck’s Remote Deposit Capture. When a merchant complies with the simple authorization requirements and passes the check through the imager (as easy as swiping a credit card), they will never see a returned check. Conversely, they will see highly competitive rates and no-cost loaner equipment for the life of their agreement.

We are not suggesting merchants stop taking Visa because we strongly recommend they accept the kind of currency that consumers wants to tender. We do suggest, however, that merchants consider taking checks for large purchases, particularly when consumers needs time to catch up on their earnings. Our Multiple Check service allows them to write 2 – 4 checks that are deposited over a 30-day period and choose each deposit date. In doing so, you will be pleasantly surprised at the increase in your operating margin. Download our free guide to learn more.

Multiple Check Insider's Guide

 

Topics: Brandes Elitch

Written by Brandes Elitch

Brandes Elitch is Director of Partner Acquisition for CrossCheck Inc. A certified cash manager and accredited ACH professional, he garnered a Master of Business Administration from New York University and a Juris Doctor from Santa Clara University.