Proxima Blog

Card Charges and the Consumer – the true story

  

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Over the last few days a lot of airtime has been given to the government’s “crackdown” on “excessive charges” levied by airlines, other retailers and even the government’s own agencies to process payments made by debit and credit cards. Consumers, championed by Which, have been rightly up in arms about the fact that these charges seem to bear little relation to the costs incurred and that these organisations appear to be profiteering from these extra fees.

However, many commentators have been openly stating that the cost to process card payments is “only a few pence” and then comparing this cost to charges of £6 or more to process your airline ticket.

This sounds incredibly unfair.

However, as so often in life, the story is not that simple…

Here at Proxima we have worked with a number of retailers in the past year to review and negotiate the fees charged by card providers and the total costs of processing card-based payments. In many instances, card charges really do have a substantial impact on the retailer’s margins.

A retailer is actually saying several people when they accept your credit card: the payment processor (e.g. Visa or MasterCard), the card-issuing bank, their merchant services provider (e.g. Barclaycard Merchant Services, WorldPay) and maybe a “gateway” provider whose software helps manage the transaction. Each of these is taking their profit margin and in the case of Visa and MasterCard, these margins are completely non-negotiable.

The charges for using a debit card (which is essentially a cash payment directly out of your bank account) are low, reflecting just the costs to process the transaction. For a credit card, however, the fees have to cover what is effectively a loan to the buyer and all of the associated costs: interest, bad debts, insurance together with all the extra benefits you can get from a credit card provider such as cash rebates, air miles, holiday insurance and so on.

So what is the true total cost to the seller?

Well, that depends…

If you’re a big retailer accepting a debit card payment then the cost really will be a few pence per transaction and the low cost airline charging £8 per ticket to process your purchase is making a mint.

But an airline accepting a credit card payment for £700 worth of tickets might be charged 2% or more of this cost (£14+), making a charge seem much more reasonable. A smaller retailer might have even higher costs and if your profit margin is very low (for example, petrol sales), the card fees might all but wipe out your margin.

Thus a blanket ban on “administration” or “card processing” fees might actually harm the consumer: the costs will get loaded into the headline price, meaning that you won’t be able to get a discount for paying by cash or debit card.

Let’s hope that the conclusions of this review are balanced, promote transparency and are not just a hasty attempt to grab headlines by hitting retailers in an already very difficult climate.

In the meantime, we will continue to help our clients to negotiate better terms with their service providers and to lobby against anti-competitive and non-negotiable card provider fees.

I welcome your thoughts on this topic. Should retailers treat card processing costs as just another cost of sale or should we expect consumers to understand the extra costs involved?