Price caps on interchange fees created many heated discussions between people involved with the payments and banking industries over the past few years. Implemented in 2011, these caps were designed to protect small businesses from hefty fees many feared would reduce retailer revenues, Payment Week reported.
For years, retail lobby groups have purported the message that small businesses rely on price caps to keep card processing services affordable. However, a recent study conducted by Javelin Strategy & Research and the Electronic Payments Coalition found that merchants may not share the same sentiments as these lobbyists. In fact, results from the survey indicate that price actually isn't a big concern for retailers hoping to improve their ability to accept credit and debit cards.
High quality is worth the price
For the most part, merchants aren't bothered by the price of card transactions. Just 11 percent of respondents said they were unhappy with how much they pay.
Fees vary based on the transaction total, and Visa and MasterCard change their fee formulas semiannually, according to BigCommerce. Generally, though, the average rate is around 2 percent of the transaction.
For a credit union's business members, these fees can add up to thousands of dollars per year. However, they don't seem to mind this, as long as they're benefiting from the service; many respondents said they'd be happy to pay a higher price if they have the option to add on additional features.
Most retailers know the importance of accepting cards at their locations. According to a Gallup poll, 75 percent of respondents said they use cash for half or less of their purchases. Twelve percent said they don't use cash at all. Clearly, cards give a much broader consumer base the option to make purchases at a merchant.
In addition to making a store's products more accessible to all consumers, accepting cards has been shown to encourage impulse purchases, further benefiting the retailer, according to the Small Business Administration.
While the business may lose 2 percent of a transaction to card processing fees, that transaction may not have happened at all if it wasn't for the merchant's ability to accept a card. For most businesses, accepting cards is the clear choice that points to greater profitability. In fact, of the 11 percent of respondents to Javelin's study, three-fourths said that high processing fees don't impact their bottom lines.
Understanding interchange fees is key
Through the study, Javelin found there was one factor that was particularly associated with a merchant's dissatisfaction with the processing fees it pays: a clear understanding of interchange fees and regulations.
Merchants that understand the principles of interchange fees and the reasons behind government regulations are more likely to be happy with what they pay. Additionally, these people are more likely to opt for additional features, even if they come at a higher price.
According to the study, about 66 percent of respondents said they understand interchange fees, but three-fifths said they weren't clear on the reasons behind a federal price cap.
Further, merchants that reported already implementing EMV-compatible payment terminals at their locations were more likely to say they were satisfied with their interchange fees. Just shy of 70 percent of merchants said they were either EMV certified or had already begun the process of becoming so.
A teaching opportunity for credit unions
Given the results of Javelin's study, there are several things credit unions can do to work with their small-business members on improving their card processing plans.
- Review their options
First and foremost, credit unions should review their offerings with their business members. In addition to informing members of exactly what services they're paying for, credit unions should also make sure members know what other services are available.
- Work toward EMV implementation
Though the deadline for EMV passed more than a year ago, there remain many retailers that are still dragging their feet. Whether they aren't sure of the benefits of EMV, don't know the best way to become EMV certified or worry about the cost of implementation, this is an issue that credit unions can address head-on.
Though it's technically not required that retailers accept chip payments, there are many benefits to doing so, both for the merchant and the consumer. Credit unions should be sure that information about EMV is readily available to their business members. They should also make it clear how the institution can help retailers adopt EMV.
- Educate members about interchange fees and regulations
Perhaps the biggest takeaway from Javelin's study is the importance of educating business members about why they pay the fees that they do.
Consider what happens when a consumer sees an unfamiliar charge on a credit card bill. There are likely few instances where a consumer doesn't mind this seemingly random fee. More often than not, the consumer wants an explanation, if not a refund.
It turns out, small-business owners are the same way; when they don't know exactly why they're being charged, they're probably not going to be happy about making the payment. Explaining the reasons behind interchange fees can improve the relationship between merchant and credit union, and position the financial institution as a helpful partner to the retailer.
Despite the common notion that small businesses resent high processing fees, it's clear that many understand the importance of accepting cards at their location and are generally OK with paying the price. Credit unions that make an effort to educate their members about financial regulations and how those rules impact small businesses could experience stronger relationships with the entrepreneurs they work with.