CoxEckert595

My grandmother has always taken an interest in my personal and professional undertakings but I was still surprised when she expressed the desire to learn more about my job as a merchant account manager (not exactly a titillating position). During the course of our discussion, I explained that we generally charge between 1.5% and 1.75% for retail transactions (depending on the type of card) and over 2% for Internet and MOTO (mail order telephone order) transactions. My grandmother shook her head in disbelief and immediately determined that these fees "were too high." "Andy, she exclaimed, "You're making 2% profit on each transaction! How much is enough?"

It was time to give Grandma the abbreviated course, Merchant Accounts 101. I explained that our company, indeed all Processing Equipment banks, are governed by interchange rates - uniform rates that Visa and Mastercard charge their member banks. These, in essence, are our buy rates and if we charge lower than the interchange rates, we will be losing money. "So, you see Grandma," I added, "We don't make 2% on every transaction, but only several basis points." I expounded, "A basis point is only 1/100th of a percentage point." She quickly reversed course and then said with a smile, "Maybe you're not charging enough."

Certainly, business owners, particularly those that are large and process an incredibly large monthly volume of credit card transactions, don't want to hear that the fees should be raised! Some are even calling for government regulation to ensure a reduction in credit card processing fees. Large retailers, including Kroger and Safeway grocery chains, behemoth drug stores, such as Walgreen and Maxi Drug, and others are even engaged in a lawsuit with Visa and MasterCard, declaring that Visa and MasterCard, for all intents and purposes, are monopolistic entities that violate antitrust laws. The retailers believe that Visa and MasterCard's standard, uniform fee structure need not change, simply that the associated fees should be reduced.

But how, in practical terms, is this going to be accomplished? Visa and MasterCard are unlikely to determine that their profits are too high and implement interchange price reductions. Consequently, retailers are urging for state and federal / legal intervention requiring Visa and MasterCard to adopt "cost-based pricing."

Cost-based pricing may be summarized by the following simplistic formula:

Cost of product or service + Percentage of fixed profit = Cost-based pricing.

But determining the total cost, including Visa and MasterCard's variable and fixed costs, are extremely difficult to calculate. But even if the cost side of the equation (on the far left of the equation) cannot be determined with complete accuracy, retailers are demanding that Visa and MasterCard reduce the fixed profit percentage.

My initial reaction to Low Rate Merchant Accounts position was one of approval. Corporate greed (are you listening Exxon Mobil?) hurts the average American consumer whose wallet continues to shrink. It is disconcerting to know that corporate CEOs, CFOs and those on the board get enormous raises, bonuses, benefit packages and huge retirement stipends when so many in the work force can barely make ends meet.

Perhaps if credit card rates would be lowered, then these large retailers would offer customers lower prices. Consumers would benefit and everyone will be happy - well, save for the folks high up on the corporate Visa and MasterCard ladder.

But then I started reading more about this issue and learned that large retailers may very well decide not to pass on their credit card processing-related cost savings. As one author wrote, "the hypocritical retailers do not sell their own goods for 'cost-based' prices." Indeed, profit is the name of the game and these big boys may have trouble sharing their newfound good fortune.

Moreover, if Financial Institution regulation were enacted, Visa and MasterCard are unlikely to just sit on the fence, bemoaning the fact that they have to reduce their interchange fees. Somehow money will be recouped and it probably will be through the good, old American consumer / credit card card holder who will be assessed additional fees to use credit cards. Think about the domino effect that higher gasoline prices have caused, leader to higher costs in so many industries.

There remains a silver lining even if the federal and/or state government does not intercede with Visa and MasterCard's policies. There are merchant account providers that are willing to price their service using "cost-based pricing." As long as such companies remain in the black with their merchant accounts, they may be willing to make the slimmest margin of profit. Less individual profit may only maximize total profits in the long run as these companies will get their share of referrals.

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