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Letter from the CEO: The Cost of Payment Acceptance (MAG Quarterly- Volume Four, Issue One)

By Mark Horwedel, CEO, The Merchant Advisory Group 

March 3, 2016

The Kansas City Fed recently completed a study of payment card chargebacks, traditionally one of the most complex and least understood aspects of card acceptance. Among the findings, the Fed concluded merchant losses from chargebacks amount to about 5 basic points of sales volume. It comes as no surprise to merchants that chargebacks represent a material cost associated with payment card acceptance, however, it may come as a shock to those who believe the many industry pundits who contend the cost of payment card acceptance is much lower than the cost of other forms of payment. Unfortunately, many of the pundits typically ignore important elements of the cost associated with payment card acceptance, including chargebacks and many other costs unique to this form of payment.

At the dawn of card industry, credit card interchange averaged about 1.25% of the purchase amount and a 5 cent flat fee per transaction, a far cry from today’s bloated interchange rates. The card industry generated most of its income from consumer interest on revolving credit, not from interchange fees and a variety of sin fees collected from consumers and merchants. Today, interchange, fines and fees associated with non-compliance with rules, chargeback and exception processing, late payment fees and fees from exceeding pre-set credit lines provide significant sources of revenue absent from the early days of the industry; and, there seems to be no limit to the creativity of the industry to squeeze more out of merchants. Recent examples are the failure to reverse interchange on returns of goods and services and the huge Christmas gift to card issuers implicit in EMV’s liability shift. 

The cost of payment card acceptance includes a great number of important elements, like chargebacks, which have often been ignored by many of the proponents of the card industry. Here are some that deserve attention and should not be ignored when calculating the cost of payment card acceptance.

  • PCI compliance- PCI has essentially saddled merchants and their acquirers with the bulk of the responsibility of protecting the card industry from fraud. The cost of complying with the myriad rules is enormous and there are no equivalent costs associated with other forms of payment.
  • Security breaches- Merchants are fined by the card industry and suffer even more significant loss of public confidence when breaches occur. The fraud-prone nature of payments cards is the central problem with sensitive cardholder information exposed on the face of the card itself and in the information encoded in the magnetic stripe. Breaches of sensitive cardholder information typically result in financial losses far beyond the losses associated with the theft of cash, checks or other popular forms of payment, even threatening the survival of the entire enterprise.
  • Breach insurance- Premiums associated with insurance policies which may mitigate damages associated with breaches are very expensive and typically greatly exceed costs associated with insurances against the theft of cash, checks or other types of retail payments.
  • The cost associated with the ever-evolving specifications and maintenance associated with EMV, NFC, tokenization and other technology unique to card acceptance. The constant flow of requirements ties up scarce data processing resources resulting in lost opportunities to address core business needs.
  • A never-ending stream of new network fees which have accelerated in number and in financial impact during recent years subsequent to the networks joining the ranks of public corporations.
  • Acquirer fees, ISO fees (small merchants), POS hardware, software and support systems.
  • Fraud prevention systems for e-commerce platforms. 
  • Personnel costs related to managing interchange qualification, acquirers, ever-changing PCI and rule compliance, systems maintenance (far above the costs associated with other forms of payment acceptance).
  • Increased costs associated with the significant shift of brick and mortar sales to digital channels (multiple authorizations, higher return rates with no reversal of interchange, risk management and mitigation, along with unjustifiably higher interchange rates and the failure of issuers to accept the risk of fraud).
  • Costs associated with the impact of EMV on the checkout process- Merchants emphasize speed of checkout and for some it is a top priority. For example, QSR magazine does a study every year where they measure the speed of drive-thru’s across many restaurant segments ( Contact EMV has slowed down lines at most of the merchants that have converted their POS to EMV. For some merchants, the choice between slowing checkout and accepting liability on counterfeit fraud is a choice between two very costly options.
  • Another unique factor associated with the cost of payment cards is that they are managed exclusively by the card networks and the prominent card issuers. Unlike cash and checks which are managed by the Fed and subject to requirements for open standards and public scrutiny, the rules associated with payment cards are promulgated exclusively by interests that regularly tip the scales against merchants. Balance between stakeholders in the payment card business is non-existent and results in one-sided developments like the recent EMV mandate in which merchants are paying for the vast majority of the costs associated with the conversion while witnessing a slow-down in their check-out process and very little benefit, if any, related to diminished counterfeit fraud.

When viewed in their entirety, there seems to be little doubt that the costs associated with payment cards far exceeds that of other forms of payments and is for many merchants the second or third highest cost of operation. The bottom line- don’t believe everything you read about the cost of payments. Many of those who have previously reported on the subject derive most of their income from peddling services to the networks and issuers that dominate the payment card business. Instead, talk to merchants who have objectively studied the subject and be sure to consider the costs listed in this article if you undertake a study of your own.