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Do MasterCard and Visa Bring Higher Prices for All?

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We're used to thinking of American corporations fighting one another, competing for market share and consumer dollars. But every now and then, often unbeknownst to us, they band together.

That's happening right now, as many companies strike back against credit cards. Striking a loud blow is the "Merchants Payment Coalition," which comprises many industry groups, each of which in turn comprises lots of companies. One member, the National Retail Federation (NRF), includes companies such as:

  • Abercrombie & Fitch (NYSE: ANF  )
  • Best Buy (NYSE: BBY  )
  • Yum! Brands
  • Whole Foods (Nasdaq: WFMI  )
  • Sears Holdings (Nasdaq: SHLD  )
  • Macy's
  • Harley-Davidson (NYSE: HOG  )

Together, the coalition's members employ 50 million workers.

What's the beef?
What's their gripe with credit cards? Well, you may know that when you charge something at a store, the store pays a little fee to your credit card company -- that's the "interchange fee." The thing is, it's not such a little fee. It's set by credit card networks like Visa (NYSE: V  ) and MasterCard (NYSE: MA  ) and is typically around 2% of your purchase, and it can be even higher than that, depending on what type of card you use.

Think about it: If you charge $300 at your local home improvement store for some cans of paint and painting supplies, the retailer might have to fork over $6 to your card company. (The fee is charged on your whole transaction, including any sales tax -- not just on the products or services you bought.) If your total credit card bill for the month is $2,000, you may have generated $40 that gets split between the bank that issued your card and the card networks. If you charge $24,000 per year, as many of us do, that's $480 for the credit card companies, from just one person or household! The NRF estimates that the total interchange fees collected in 2008 added up to about $48 billion. That's a lot, no?

The retailers think so. And I see their point. After all, retail in general isn't a high-margin business. As solid a company as Best Buy has been over many years -- its stock has risen an eye-popping average of 28% per year over the past 20 years -- it sports a net profit margin of just 2.2%. Sears' margin recently was just 0.1%. Whole Foods' was 1.4%. For companies with tiny margins, a 2% cut off the top is a big deal.

So what?
Well, the thing is that retailers -- especially those with low margins -- can't afford to take the cost of interchange fees out of their profits. To stay in business with lean profit margins, the only way they can cover a 2% fee is to pass it on to their customers. What that means is that the prices you pay are often a little higher than they might otherwise need to be.

Of course, if you have a card with perks like cash rebates or frequent flier miles, then your bank basically shifts some of its revenue from those fees to you. If interchange fees were to disappear, you could also expect many reward cards to go away as well.

What to do
Congress is looking into all kinds of reforms for the credit card industry right now, as it focuses on what will be good for consumers. We can support that effort by letting our representatives know our thoughts -- and we can support an examination of interchange fees, too.

Learn more in our Credit Center and in these articles:

Longtime Fool contributor Selena Maranjian owns shares of Yum! Brands. Best Buy and Whole Foods Market are Motley Fool Stock Advisor recommendations. Best Buy and Sears Holdings are Inside Value selections. The Fool owns shares of Best Buy. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.


Read/Post Comments (10) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 13, 2009, at 4:30 PM, Clem789 wrote:

    No company can afford these fees off the top of each transaction, especially when may retailers are already layering discounts upon discounts to make a sale.

    Of further note is the fact that the mileage cards or points cards are assessed to each retailer at higher rates than debit or "normal" cards. In fact, there may be 40-50 different fractional assessment rates out there based on the issuer, points, miles, etc.

  • Report this Comment On May 13, 2009, at 5:00 PM, quixel wrote:

    Wow,very misleading!! Visa and Mastercard get only a fraction of the fee charged to the merchantsIt is the banks that get most of itYou also fail to mention American Expres and Discover which routinely gets a higher % of the sale as they are aso the issuer of said cards. You also fail to mention that without Visa and Mastercard and the other Credit and Debit cards,these businesses would not be doing anywhere near the business they do now and would never have grown over the years to the place they are today.The consumer also would not be able to do debit and have the freedom to not carry large sums of money around I will be traveling out of the county in a few days and the peice of mind of not having to carry around cash is worth the fractions of a % the Card companies actually get. Government Regulations add more of a cost to most Products by far then the Credit Card companies could ever hope to make Why don't you attack the Government for a lot of the pork added to the cost of Products that they in turn give to there buddies in Unions and other hush hush groups. Oh right WE are no longer allowed to say anything negative about the Government without fear of reprisal. Might as well live in Nazi Germany or Venezuela if you can't question who the real bad guys are or be honest of Where the money actually goes. Look at the costs and taxes and fees that the producers of products hve to pay and the shipping costs and real estate and taxes and fees the companies pay that sell the products and so on before you pick on only one group to demonize!! Sounds like someone has an Agenda!!!!

  • Report this Comment On May 13, 2009, at 5:09 PM, quixel wrote:

    Oh I just noticed Selena has holdings in Yum! brands

    hmm conflict of interest much? I wonder how much Yum! brands companies over-charge people on products?? I know for a fact Pizza Hut rountinely cheats people out on their product PIZZA's...They have guidelines of how much product to put on pizza's(You are paying for the agreed amount of ingrediants)but to save costs to make more money they cheat people out of cheese all the time.Any high dollar ingrediant they shave a little off each Pizza(not at every store but it happens all over,been there done that ,worked there,managed there,seen and heard it all) Taco bell? Does the same,KFC,I don't know how many times i have gotten inferior product from them,received food that should have been thrown out hours before,anything to make a buck.....See let's start throwing bricks at all places even the one's Selena profits from. =D

  • Report this Comment On May 13, 2009, at 5:17 PM, Melaschasm wrote:

    This is one of the reasons that Walmart wanted to gain limited banking capabilities. Just think if they could capture .5% of their credit card sales in additional revenue with very little increase in costs?

    And this is just one of the many ways in which finance companies are profiting from retailers.

    Ironically the US government denied Walmarts request to own a bank because it was to risky!

  • Report this Comment On May 14, 2009, at 10:21 AM, Dolphins99 wrote:

    If the fee is to high , then the retailer has a right to not use the service. You can't have it all for free, If you want a credit card carrying customer shopping in your store then you should at least pay the person who is bringing them in. Right? Use cash only. Gas stations are doing it already. Why do we need the government to get involved?

  • Report this Comment On May 14, 2009, at 2:33 PM, Bowlrace wrote:

    Merchants have the option to charge the 2% less to those that are paying cash, but a majority do not. So if you look at the whole scheme of things the blended rate is much less than 2% that the merchant pays, as for the most part, regardless if you pay with cash, check, credit or debit that gallon of paint costs the same amount regardless of your payment choice.

    Banks also have costs that comes out of the revenue generated from the interchange to include cost of funds, paying the issuer's processor that handles the transactions, bad debt charge-off and fraud.

    I don't see these retailers helping to pay for the fraudulent cards they accepted or the bad debt when joe blow can no longer afford the big screen he continues to watch that he got from Best Buy that Besy Buy earned the revenue off of. Look at Target, they want out of their card business because of their write-offs when no one pays for the goods they purchased.

    With any legislation changes to interchange, the merchant is not going to reduce the cost of goods, they will just keep the extra for themselves. Me personally, I have no issue paying the amount already built into the price as I do not want to carry cash and are affored extra purchase protections with credit and debit that I am not with cash/check purchases. Let the merchants increase their cash/check handling costs as well as increased costs from going back and accepting checks so they can lose the merchandise and the money and see who is whining in the end.

  • Report this Comment On May 14, 2009, at 11:28 PM, LESHABS wrote:

    AS AN EXAMPLE: IF YOU BUY A SHIRT OR A SKIRT AT ROBINSONS OR MACYS, AND DECIDE ITS TOO EXPENSIVE, AND YOU DO NOT WANT TO PAY FOR IT, VISA NOR MASTERCARD DOES NOT CALL YOU BUT BANK OF AMERICA OR WELLS FARGO OR WHOMEVER ISSUED THE CREDIT CARD TO YOU WILL CALL OR SEND YOU NASTY LETTERS, OR HOUND YOU. EVENTUALLY, YOU WILL HAVE COLLECTION AGENCIES HOUNDING YOU TO DEATH!!!

    SO WHERE DO MASTERCARD AND VISA FIT IN THIS PICTURE??

    WELL IN THE ITITIAL TRANSACTION THEY GOT THEIR PITANACE OF MAYBE 2% FOR THE TRANSACTION, AND NOW THEIR OUT OF THE PICTURE -- COMPLETELY!!!!

    SO THE LESSON TO LEARN HERE IS: MASTERCARD NOR VISA ARE NOT THE "BAD GUYS" "BAD CREDIT CARD COMPANIES" , BUT WELLS FARGO , BANK OF AMERRICA OR WHOMEVER ISSUED THE CARD TO YOU ARE THE BAD GUYS AND WILL EVENTUALLY CHARGE YOU 15- 30% IN INTEREST TO COLLECT ON THIS SHIRT OR SHIRT!!

    HARD LESSON TO BE LEARNED!!!!

    PLEASE ACKNOWLEDGE!!!

  • Report this Comment On May 15, 2009, at 12:26 PM, Bowlrace wrote:

    Why are the banks the bad guys if you bought something and later decided it was too expensive and you could not pay for it. The bank loaned you the money so you could get that shirt, just as if you went in to your branch and signed up for a signature loan. The problem with this country - most people will not take accountability for their actions. You bought it - you pay for it! If you could not afford it, don't buy it! If you have the merchandise and can no longer pay for it, forget increasing interest rates the banks should just start charging these people with theft. Maybe this will cause people to think before maxing out all of their cards then deciding they did not have the money to pay for it, but still enjoy watching their new big screens looking at the time on their new rolex.

  • Report this Comment On May 15, 2009, at 5:52 PM, ralphn8r wrote:

    Who also insures your purchase against fraud, warranties and the like? Visa and Mastercard. To process the millions of daily charges and debits by each business and bank would cost many times over what these companies pay. Want to coerce buyers to pay cash? Give a discount for cash, but remember these large retail companies also get a kickback from the credit card companies whenever they open a card.

  • Report this Comment On May 15, 2009, at 6:57 PM, Bowlrace wrote:

    There is one of the misnomers though - MasterCard and Visa set the rules that the merchants and issuers must play in to resolve fraud, warranties and the like, but it is the issuer that takes about 80% of all the fraud and any write-offs if a dispute is not won in a cardholder's favor for the sake of "customer service." MasterCard and Visa do not take any of the losses, they only created the chargeback rules and such. You reduce interchange, the issuer still has to bear the same amount of fraud, but may be they won't be as happy to write-off an amount on a dispute for Custome Servivce in the future. merchants that obtain a signed swiped sales dratf, regardless whos name or scribble is on it is protected by fraud losses. The only merchants that truly take the loss are Internet merchants, but they have several tools available, which most do not use, which could lower their exposure to losses.

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Selena Maranjian
TMFSelena

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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