Passions Are Far from Cooling in Debate over Card Interchange

Wal-Mart Stores Inc. paid discount fees totaling more than $1 billion to take credit and debit cards in the 12 months ended Jan. 31. Acceptance costs now exceed health-care premiums at The Home Depot Inc. And TJX Cos. Inc. finds sagging apparel prices make it difficult to recoup acceptance costs from customers. These were some of the salient facts that emerged on Thursday in Chicago during a spirited debate over card interchange between retailer representatives and an executive from MasterCard Inc. The debate, which grew heated at times, underscored the passions evoked by the controversy surrounding interchange fees and showed how these passions are far from cooling off. Indeed, Michael A. Cook, vice president and assistant treasurer at Wal-Mart and the executive who disclosed its annual card-acceptance cost, referred to interchange as an “addiction” to which the card networks and banks have fallen prey, making it difficult for them to listen to the merchant point of view on the subject. Cook, who was speaking as part of a panel at a Federal Reserve Bank of Chicago conference on payments pricing, decried how the banks' interest in maximizing interchange income leads them to promote signature debit transactions over those secured by PINs. The former carry higher interchange fee than the latter. Wal-Mart, which some time ago installed software that allows its cashiers to prompt customers to enter PINs for debit cards, had hoped the move would moderate its debit card acceptance costs, much as its decision to convert checks to electronic debits on the automated clearing house has cut its check-acceptance costs. Nonetheless, Cook said, “our [debit] cost continues to grow.” Even though the Bentonville, Ark.-based chain's signature-based transaction volume is 27% lower than its PIN volume, it finds it deals with 100 times more chargebacks and three times more customer-service issues on signature transactions, Cook complained. Wendy Sutton, assistant vice president and director for credit and check programs at Framingham, Mass.-based TJX, noted that interchange costs keep rising for the merchant while its ability to raise prices is deteriorating. Indeed, she said, retail prices for apparel, TJX's chief product line across TJ Maxx, Marshall's, and the other chains it operates, have been falling. “As we see interchange going up, we've got to find a place to carry this cost,” she said. “It's not the case that this can always be a pass-through to the customer.” On a separate panel, Dwaine Kimmet, vice president of financial services at Home Depot said card acceptance now represents the home-improvement merchant's third-largest expense, greater than health-care insurance. In the Visa Inc. and MasterCard networks, acquirers pay interchange to card issuers and then pass the cost on to merchants along with other costs of acceptance in the form of discount fees; interchange typically represents by far the largest component of this cost. Since 2002, Atlanta-based Home Depot's acceptance cost has risen 16% while its overall sales have grown 10%, Kimmet said, adding that “I have to question the value that's being delivered” by card acceptance. “The amount of money we're spending on interchange would put 10 associates in each of our stores,” he said, arguing this could render better service to customers than accepting their cards. One solution for merchants, Kimmet argued, is a private-label credit card. The one Home Depot issues, with receivables funded through Citigroup Inc., can now be approved for a customer at the cash register in under 90 seconds, Kimmet said, thanks to new technology. “Home Depot has had incredible success with this this year,” he said. But Josh Peirez, group executive for innovation platforms at MasterCard, argued the value merchants get from the bank card network outweighs interchange costs. “It's not even close,” he said. He pointed out that banks wrote off 2.41% of total card volume in 2006, while interchange averaged 1.81%, arguing merchants would have assumed a far higher cost in the form of credit losses had they issued the cards themselves. “To me that means the market is working,” he said. “We will continue to set interchange fees at a level that maximizes our business, as we should,” Peirez said. He invited merchants to seek out payment alternatives if they feel their acceptance costs are veering out of control. “Merchants should innovate instead of trying to get regulators to regulate,” he argued, referring to merchant-led efforts to pass federal legislation regulating interchange (Digital Transactions News, May 14). “If our fees are too high, then drive volume to our competitors.”