Retailers and credit card companies are increasingly skirmishing over rates and transaction fees -- and it has lead to some tense situations.
Consider these cases: A large outdoor retailer in Minneapolis slaps a lawsuit against its credit card partner for rejecting customers whose credit scores are too high. A finance company ditches a Colorado fitness retailer because its clients paid off debts too quickly. In Kentucky, a paddle sports retailer rails against unfair credit card transaction fees that squeeze his business. In Florida, a fitness retailer constantly searches the market for deals on banking services, trying to stay a step ahead of fee increases and policy changes.
It’s getting so crotchety out there the federal government has stepped in, inserting new credit card transaction fee rules in the massive financial services legislation signed this summer by President Barack Obama.
Like many small business owners scratching out a living in the recent down economy, specialty outdoor retailer Doug Davis, owner of River City Canoe & Kayak (www.rcckonline.com ) in Louisville, Ky., fumes over credit card transaction fees.
“In the last four or five years, the fees credit card companies charge have doubled or more,” Davis told SNEWS®. “The rate of growth of credit card fees doesn’t make sense. These companies are getting 2-3 percent of revenue. It has the potential to break a business.”
Credit card companies, Davis argued, recognize that U.S. consumers have switched to virtually cash-less dealings. Nine out of 10 U.S. customers swipe credit cards to make most purchases, he said. Knowing retailers can’t exist without them, the credit card industry, he said, “rakes up as many fees as possible.”
“This is killing specialty retailers,” Davis said, “because we are typically small business owners, and 2 percent of all of my gross sales adds up to a lot of money every year.”
Credit scores too high?
A cantankerous legal dispute in Minnesota underscores the brewing discontent. In the case, a federal lawsuit filed by large outdoor retailer Gander Mountain accuses its credit card issuer of rejecting a number of financially responsible customers because their credit scores were – get this -- too high. Gander Mountain filed suit in late June against its financial partner -- card issuer World Financial Network National Bank of Columbus, Ohio.
The suit claimed World Financial Network turned down shoppers with nearly perfect credit scores, because those customers didn’t do enough for the banking concern’s bottom line. Rejecting those clients created a “negative customer experience,” the lawsuit noted, that could push customers away.
Gander Mountain, which went private this year, operates 115 hunting, fishing, camping, boating marine and outdoor lifestyle stores in 23 states. It had 2007 fiscal year sales of nearly $1 billion.
An online marketing pitch for the Gander Mountain Credit Card, deal sounded swell: 2 percent off all purchases, generous rewards program, no annual fee. It didn’t mention anything about the danger of having credit scores that were too high.
Credit card issuers, squeezed by the recession and tighter lending regulations, have been scrambling to recoup revenue they used to gain from penalty fees, high interest rates and fees charged to risky borrowers.
World Financial, which has more the 85 private label, co-branded card programs with retailers that include Tween Brands, Limited Too, Ann Taylor Stores and Hudson’s Bay Company, is a subsidiary of Alliance Data Systems Corp. of Dallas. Citing a company policy against talking about litigation, Alliance Data corporate spokesman Shelley Whiddon declined to discuss the Gander case or other issues retailers face regarding the use of credit cards when SNEWS inquired.
Gander Mountain spokesman David Ewald acknowledged the company filed the suit but also refused to discuss it. He told SNEWS the case has struck a nerve with the public and agreed that it had caused a stir. Indeed, the suit garnered the interest of large newspapers from the Minneapolis Star-Tribune to the Washington Post.
“It definitely caught some attention,” Ewald said.
At Colorado Home Fitness near Denver, owner Chip Hunnings told SNEWS he’s never had clients turned down for financing due to credit ratings being too high. But a couple of years ago, a finance company dumped his company and said the reason was the store’s clients were paying off all their debt within the interest-free grace period.
“We have had very few people interested in financing over the last year despite in-store material promoting it,” Hunnings said. “If we get a price objection and suggest financing, nine times out of 10 the customer quickly said they were not interested in taking on the debt.”
Regarding processing fees, the home fitness equipment retailer was sanguine: “Of course everyone would like to be able to pass the 2-3 percent in fees along to the customer as saving to them versus paying the processing companies, but it has always been a part of business.”
Carlos Vazquez, president of Busy Body Gyms To Go of Florida, has seen credit card transaction rates rise. He said he faces the challenge, in part, by shopping around meticulously for the best rates.
“Every year we bring in other people in to pitch their services,” Vazquez said. “They come in and put their pitches together. We have made three credit card changes in nine years. It’s a little inconvenient, but it makes a difference.”
Shopping around for financial services has paid off with “nominally better rates,” Vazquez said. He also said he encourages staff to get the best possible information from customers paying with credit cards. Having accurate information can help keep transaction rates down.
“We’ve seen the fees going up but it’s always been challenging,” Vazquez said.
“With the economic factors and declines in sales, every cost has a bigger red flag on it. Only thing you can do is shop for better fees.”
Some see relief in new federal government rules and regulations.
Included in financial services legislation signed in July by President Obama are provisions that address credit card and debit card fees. Under the financial overhaul bill, the Federal Reserve gets nine months to establish regulations for reasonable processing fees for debit cards. The new law says the Fed has authority to set fees that are “reasonable and proportional to the actual cost incurred by the issuer or payment card network with respect to the transaction.”
The measure also allows retailers to refuse credit cards for purchases under $10 and offer discounts based on form of payment. Already some merchants – such as some gasoline retailers – offer discounts for paying cash or don’t accept credit cards.
Swipe fees – officially known as interchange fees – are a percentage of the transaction charged by card company banks each time a card is swiped to pay for a purchase. The fees average between 1 and 2 percent for debit cards and 2 percent or more for credit cards, according to the National Retail Federation, which lobbied for new government regulations. Some regulation for sky-rocketing swipe fees is already underway. Click here to see a July 19, 2010, SNEW story, “Credit card swipe fee legislation clears final hurdle.”
“The real solution won’t come until there is genuine consumer transparency and competition that lowers credit card fees to a point that reflects banks’ actual costs for processing transactions,” said Mallory Duncan, NRF senior vice president and general counsel in a July statement about credit card swipe fees and the new financial services legislation.
-- Stuart Glascock