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August 3, 2010

Retailer fee complaints ‘pointless’

Now they have something to new to argue about the pricing of innovative new payments products like contactless and mobile Louise Naughton reports on the concerns of retailers and why some in the industry claim the complaints are a smokescreen.

By Verdict Staff

Banks and retailers have been at loggerheads for years over interchange pricing. Now they have something to new to argue about – the pricing of innovative new payments products like contactless and mobile. Louise Naughton reports on the concerns of retailers and why some in the industry claim the complaints are a smokescreen.


Retailer complaints about unjustifiably high fees on emerging payment technologies have been labelled “pointless” and a “smokescreen” by industry experts.

British Retail Consortium (BRC) director general Stephen Robertson has argued that as payment technology develops card charges should be going down, not up.

“There is no justification for such big differences in charges between cards and cash,” said Robertson. “Contactless systems can bring benefits but banks are currently levying charges on card payments well beyond what it actually costs to process these transactions. They can’t expect to maintain these excessive charges as numbers of non-cash payments grow.”

Richard Dodd, head of media and campaigns at the BRC, said that as contactless payments are targeted to take over from lower value transactions, which are traditionally made by cash, bank charges need to be more in line with current cash charges than credit or debit transactions.

He goes further, and said that if bank charges do not come down to a fair rate then retailers would be reluctant to invest in new payment technology.


Richard Dodd, head of media and campaigns at the BRCRevenue stream for banks

Dodd suspects that banks are pushing contactless payments because they stand to make a lot more money processing the transactions.

According to the BRC, accepting payment by debit card costs a retailer four times more than when a customer uses cash. It claims that bank’s charges for handling debit card payments have almost doubled in five years.

Through research gathered from the BRC’s annual Cost of Collection Survey, which includes results from over 7bn transactions in 21,500 shops of all types, the average cash transaction costs retailers £0.021 ($0.032); a debit card payment costs £0.085 and a credit card payment costs £0.34.

Sandra Quinn, director of communications at the UK Cards Association disputes these figures and said that it is ‘pointless’ making bank charges more transparent.

“Fifteen years ago it wouldn’t have been out of the ordinary to pay £0.20 for a debit card transaction. There is no way debit fees were £0.04 five years ago. We feel that £0.08 is reasonable pricing,” she added.

According to Quinn, the BRC will not publish and distribute the report. She argues that she can see no evidence of charges increasing and seeing the report would be a good start to open dialogue between banks and retailers.

Dodd at the BRC said retailers are in favour of contactless and mobile payment technology, but their enthusiasm is directly related to fair charging.

“If the technology makes transactions quicker and more convenient for the consumer and retailer then it can only be considered a good thing. But charges have to be fair and transparent,” said Dodd.


Sandra Quinn, director of communications at the UK Cards AssociationAsking for transparency

The BRC is calling for a much more transparent charging system, one that will more closely translate to the actual costs involved.

It foresees that greater transparency will automatically lead to lower bank charges as it will become clear how much more the banks are charging in comparison to the costs involved. The BRC claim that the actual costs that banks and acquirers incur are extremely small.

“They are upfront about how much the merchant service charge is and how much the interchange total is, but in terms of the components of interchange – fraud, and interest-free period – we still have no idea what these amounts are and how they are calculated,” said Dodd.

“We just see a lump-sum figure. It’s worse for small retailers who probably don’t even get a breakdown.

“Banks talk a lot that cash is in decline and that technology is the future but it is clear that cash is still the dominant force and clearly thriving.”

According to BRC figures, cash is the preferred method of spending, amounting to 58% of all transactions. This is up on 56% in 2008 but down on 61% in 2007.

Dodd told CI that there is no recognition from banks that charges are too high. They seem keen to justify rather than accept, and there is no evidence that they have agreed to bring in more transparency now or in the future.

Paul Love, a business solutions consultant at electronic software provider ACI Worldwide, acknowledged he hasn’t seen any evidence of transparency in UK banks.

But he said a case study on Canada’s largest processor of debit, credit and gift card transactions, Moneris, showed how it can be done.

According to Love, Moneris, which looks after 450,000 merchants in Canada, has adopted a highly transparent service-based pricing model in which merchant service fees are charged on a pay-per-use basis.

This starts with interchange plus-pricing where the actual scheme interchange for each transaction is calculated precisely, and additional charges are added for specific services that Moneris provides.

One example of this is that merchants are billed for customer services based on the actual minutes spent on the phone, rather than a general facility fee.

This transparency helps Moneris negotiate competitive terms with cost-conscious merchants, by removing factors that are not in their control, such as interchange, and allowing the merchant to choose not to take specific services and see a direct saving in their fees. None of this flexibility is available with traditional ‘bundled’ pricing models.


Bringing the cost down

Love added that the BRC’s members typically comprise large retailers, not small retailers, such as newspaper stands and corner-shops.

He said for larger retailers, who have the funds to invest in contactless payment technology, the bank charges are a reasonable price to pay. Yet the economics of contactless technology for small retailers simply do not add up.

“To pay out a proportion of profits on low-value items will hit the small retailer hard. These low-value transactions are the market contactless payment technology is aimed at, and that is the main problem that retailers face,” Love told CI.

The BRC claims that if charges for every payment method were as low as they are for cash, its members could pass on £480m in cost savings to their customers.

This is not backed up by the experience of Australia, however, which implemented caps on levels of credit card interchange.

The country’s central bank has admitted it is unclear whether the measures have had any impact on the prices consumers ultimately pay for goods. It also indirectly drove a domestic credit card scheme, Bankcard, out of existence, effectively reducing competition.

Quinn added that one of the problems between retailers and banks is the ‘naïve’ notion that cash is free.

“The BRC continues to ignore the true cost of handling cash. If a retailer accepts a stolen card their bank will cover them for the fraud loss, but if the cash they accept goes astray, they take the hit,” said Quinn.


Paul Love, business solutions consultant at electronic software provider ACI WorldwideRaising the profile of contactless

Gilles Ubaghs, a financial services analyst at Datamonitor, claims the argument over bank charges acts as a ‘smokescreen’ to hide bigger reasons why retailers are reluctant to invest in new payment technology.

“Retailers could find the cash if they were convinced it was worthwhile, but many don’t seem sure there is any real point,” said Ubaghs.

“Essentially it is a catch-22 [situation] as many consumers aren’t interested in having a contactless payment card when there are still so few places to use it and retailers don’t want to install the technology as so few people have a card.”

Ubaghs states that there needs to be more public education on contactless payments, as there is currently too much confusion surrounding it.

Consumers need to be a lot more comfortable than they are now to be encouraged to change payment methods.

“For consumers to be sold on using contactless payments, retailers and issuers will need to work together. As this is yet to happen on a large scale, it will be a good deal of time before we’re able to walk into any shop and buy a chocolate bar in the same way as London commuters tap their Oyster cards,” Ubaghs added.

Love agrees with this statement. He argues that whether contactless payment technology takes off depends on changing consumer’s mindsets, not bank charges or the technology itself.

Despite reports that Datamonitor claimed the recession has delayed retailers from investing in technology, Ubaghs told CI the recession is a temporary blip in consumer trends, and credit and debit cards are still being used for lower transactions more and more frequently.

Major retailers such as Boots and the Co-operative Food stores have recently announced contactless trials up and down the country, which does go some way to proving that customer demand and benefits can outweigh the bank charges attached to the payment method.

Quinn comments that for as long as she has known, banks and retailers have never got on and will continue to disagree over charges.

Common ground needs to be found however if new payment technology is to thrive and reach the masses.


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