Retail Exchange Fees: Pass-Thru Potential LT Positive

Takeaway: US retailers could now require that consumers pay an extra 1-3% in interchange fees for using plastic. Near-term non-event. LT positive.

Be careful what you pay for. As of this past Sunday, retailers could pass credit card interchange fees to consumers. In 2010 Congress passed legislation that required the Federal Reserve Board to regulate debit card interchange fees, and there was a subsequent settlement in 2012 between Visa/Mastercard and major US retailers about the right to pass along these fees to consumers. The retailers won the right to protect their margin against escalating exchange fees.


Under the settlement, the retailers can pass what they pay to the credit card company along to the consumer, and they need to post signage at the cash register noting their policy. This only applies to credit cards, as debit cards are excluded from the settlement. Furthermore, there are ten states – including some of the biggest – that have laws banning this practice (California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas).


This issue really has not gotten much press, which we think is due to the near uniform sentiment by retailers of all types that passing along fees is a bad way of doing business, and they don’t plan on doing so. One retailer equated the 2% exchange fee as being about the cost of utilities – which is pretty much the cost of doing business.


We have no reason to doubt the intentions of these retailers, but we’d critically ask the question – if they have no intent on passing through the fees, then why fight with federal regulators for the right to do so? Our sense is that all it takes is for one or two big retailers to begin to pass through the fees successfully, and others will follow en masse.


Keep in mind that small merchants already do a version of this (and have for a while now), i.e. gas stations typically charge a 10 cent premium for payment by card vs. cash, and many small retailers will post minimum transaction amounts in order to use credit cards.


All in, it’s a slight positive for retail. The size of consumers’ total purchase might not grow if they begin to pay interchange fees, but they’d be directly funding margin with 100% of the fee, which might be too tempting to pass up for a retailer.  Alternatively, retailers could undercut one another by advertising prices that are lower by the amount of the fee and then recoup it at the point of sale.


Again, this is a non-event today. But is an issue to keep an eye on and one that is sure to develop over time. 


Retail Exchange Fees: Pass-Thru Potential LT Positive - checkout


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