Retailers save on swipe fees with discounts
While consumers may think of interest as the only cost of paying with plastic, retailers have long been burdened with "swipe fees" the credit card companies charge them for every transaction. The Federal government instituted a cap on swipe fees on July 21, limiting them to 7 to 12 cents per transaction.
However, the National Retail Federation maintains that the cap — which significantly reduces the current swipe cost average of 44 cents per transaction — is still too high.
"It's a step in the right direction, but it's not good enough," said Mallory Duncan, SVP and general counsel at the National Retail Federation. "The actual transaction costs 4 cents or less. The banks are getting a return of 75% to 200%, while the average net profit in the retail industry is about 2%."
The US has the highest swipe fees in the industrialized world. In 2008, Visa and MasterCard charged retailers $48 billion in swipe fees, averaging about $427 per household.
Duncan anticipates that the cap will help competition, and that retailers will pass the savings along to consumers by way of lower prices. Retailers will be able to give discounts to consumers paying with cash or debit cards, saving them the swipe fees. Some gas stations have already instituted such discounts.
Of course, some retailers may simply pocket the difference. "I don't think many retailers will want to make their savings on swipe fees public, but I can envision a scenario where maybe WalMart does," said Dan Stanek, EVP at marketing firm Big Red Rooster. "It's lost customers to dollar stores, which tend to have more cash transactions, and has been trying to regain its footing as the low-price leader. It can use swipe fee-related savings as an advantage it offers over the competition."
"Merchants will also make a conspicuous effort to market incentives that push consumers to use debit cards instead of credit cards," explained Brian Dodge, SVP of communications and state affairs at the Retail Industry Leaders Association.
Retailers have previously used subtle techniques to get consumers to choose debit, incl-uding making it the default on card readers. Now they'll also be able to pick which debit-processing network to use. Dodge hopes the reform and subsequent marketing of savings will make consumers more aware of how their choice of payment costs retailers.
Doug McIntyre, CEO and founder of Cult Marketing, whose clients include Bath & Body Works and Big Lots, isn't so sure we'll see a radical change in marketing.
"There may be interesting promotions, but it'll be like what we see with online companies offering free shipping. These discounts just become something consumers expect," he said. "I don't think they'll know or really care that they're the result of changes in swipe fees."
Retailers and marketers alike expect the war over swipe fees to rage on. "There's little reason to believe that the banks will ever accept this defeat and give up," said Dodge. "However, merchants will not stop fighting to defend these reforms and expand them to address the even higher fees associated with credit cards."