Small-Business Owners Lobby to Cut Credit Card Fees

By JANE BIRNBAUM
Published: November 5, 2008

Small merchants have long chafed at the fees they must pay banks every time a customer swipes a debit or credit card. But now, with business slowing and every dollar important to their bottom line, some merchants are pushing for changes.
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Brendan Smialowski for The New York Times

Robert Kotchenreuther, owner of a dry cleaning service in Washington, says customers who use credit cards cost him $5,000 to $6,000 a year in fees, but he dares not refuse to accept them.
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The merchants are lobbying for legislation that would compel banks to negotiate fees with them and are supporting a second measure that one of its sponsors calls a “credit card bill of rights for merchants.” At the same time, some merchants are seeking class-action status for litigation claiming antitrust violations by banks and the MasterCard and Visa card networks.

Alan L. Carsrud, professor of management and entrepreneurship at Florida International University in Miami, said small-store owners have little choice but to accept the cards. “If a mom-and-pop merchant doesn’t like paying them, it can’t just stop taking cards — it would bleed customers because Americans have been socialized to use plastic,” he said.

“Although all merchants are facing real problems about profitability,” he added, “this may be a life-and-death matter for the small ones.”

A typical merchant card payment has two parts: an “interchange fee,” which includes an average 1.7 percent of the sale price and a flat per-transaction fee, and a separate fee that goes to the merchant’s bank. Take, for example, a driver who pays for a $1,000 car repair with a credit card. The bank that issued the consumer’s card receives an interchange fee of $17.10 (including a 10-cent flat fee), while the repair shop’s bank gets $4, or four-tenths of 1 percent of the total sale. The repair shop pockets $978.90.

In 2007, merchants paid $61.56 billion in electronic payment fees, up from $48.58 billion in 2005, according to the Nilson Report, a payment systems industry newsletter. The report estimated that lenders took in 82.5 percent of those dollars.

“What merchants are getting for their money is convenience, risk management and guaranteed payment,” said Denise Dunckel, a spokeswoman for Visa Inc.

Various factors make every interchange fee unique. If the magnetic strip on the consumer’s card does not work and a cashier has to enter its number manually, for example, a higher charge results. If the card “rewards” the consumer with cash back or airline miles, that, too, has a higher charge.

Beyond setting fee schedules, card agreements also reach into merchants’ daily operations. Merchants who take cards are supposed to accept them for purchases of any size. But to protect profits from customers who use plastic for everything — a recent Visa television advertisement campaign humorously suggested that only social malcontents pay with cash — some small merchants break the rule and set minimum amounts for card purchases.

“Why shouldn’t you be able to set a minimum?” asked William Dennis Jr., senior research fellow for the National Federation of Independent Business in Washington. “Some of these small guys may actually lose money on a $2 or $3 credit card charge.”

Mitch Goldstone, who owns ScanMyPhotos.com, a photo-imaging venture in Irvine, Calif., and blogs about interchange fees at www.WayTooHigh.com, said he decided to challenge the fees in 2005 after learning that fees on reward cards were going up. “I can barely understand them and I’m a lead plaintiff in the merchant litigation,” he said.

The credit card industry contends that merchants are getting good value for their contribution to the rewards card programs.

“Merchants derive significant gain from the electronic payments system, which has evolved new features such as rewards programs,” said Trish Wexler, spokeswoman for the Electronic Payments Coalition, an advocacy group in Washington. “Ultimately, merchants benefit from rewards programs because people buy more when they use cards. Higher fees for rewards cards are justified because merchants and consumers both share in their expense — but merchants want to pass their fair share to consumers, who’d be hit with higher credit costs and reduced rewards if the merchants succeed.”

Representative Peter Welch, a Vermont Democrat who has sponsored one of the measures in Congress, said he planned to reintroduce a “credit card bill of rights for merchants,” as he calls it. “Our American merchants are paying the world’s highest interchange fees, a fast-increasing cost of business for them, with literally no protections,” he said.

The congressman said the merchants told him about their card problems when he set up tables at Vermont country stores. “Some Vermonters who owned multiple gas stations said that to deal with rising gas prices and interchange fees, they wanted to experiment with cash-only at some and the status quo at others, but were told this would violate their card agreements,” he said.

Banks cut down on credit card business over rising defaults

Mumbai: Growing defaults are forcing banks to shrink their credit card portfolios aggressively. In the first five months of fiscal 2009, the credit card base in India has fallen by 1.5 million to 26.73 million, according to the Reserve Bank of India, or RBI.

Bankers said the trend has intensified in recent months and the portfolio may have shrunk by about 10% this fiscal year so far. This is significant as the industry has seen growth at an average 30% in each of the past four years.

The percentage of non-performing assets, or NPAs, in banks’ credit card portfolios has almost tripled, going up from 5-8% in fiscal 2008 to 15-20% in the current fiscal. NPAs are the portion of the credit card portfolio where a customer has not paid dues for at least 90 days.

However, this will not make a huge dent in banks’ profitablity, as despite the aggressive growth in the past few years, the amount outstanding in the industry’s credit card portfolio in August was Rs27,834 crore. This is just over 1% of Rs26 trillion credit extended by the banks in India.

The average monthly spending on cards across the country is between Rs2,200 and Rs2,400, but not every credit holder rolls over the credit. If they clear their entire due within the time frame, banks do not earn any interest on their credit. Nationally, customers that roll over part of their total debt account for about 40% of total users.

The rise in NPAs has made the banks cautious and they have virtually stopped looking for new customers.

Card cancellations, which are typically driven by both defaults on payments and non-usage, are at about 8-12% of the total card base. Banks block a card if payment is not made within 30 days and cancel it if no payment is made for 90 days.

Plastic money: Various Citibank credit cards. The average monthly spending on credit cards in India is between Rs2,200 and Rs2,400. Harikrishna Katragadda / Mint

The interest rate hike earlier in the year, coupled with a reduction in the interest-free period on cards, has led many credit-worthy customers to stop using their plastic. In July, some banks raised their interest rates by 25-30 basis points on credit card loans. One basis point is one-hundredth of a percentage point. Since interest rate on credit cards is charged monthly, a 30 basis points rise translates into a 3.6 percentage points hike in annual interest rates.

ICICI Bank Ltd, the largest credit card issuer in the country with around 8.5 million cards, had in July reduced the interest-free period on cards from 52 days to 48, and started charging some customers interest rates of 3.4%, up from 3.14%.

HDFC Bank Ltd, which has a base of 4.5 million cards, and is the second largest credit card issuer, didn’t reduce its interest-free period, but increased its interest rate band from 2.75-2.95% to 3.05-3.25%, beginning 1 September.

Dollar rates rise in Asia despite global rate cuts

NGAPORE, Oct 9 (Reuters) - The cost of overnight dollar funding rose as high as 7 percent in Asia on Thursday, reflecting persistent fears in credit markets even after coordinated interest rate cuts by major central banks around the world.

Overnight dollar funds were quoted at 5.5-7 percent in Singapore and around 6.5 percent in Kuala Lumpur, traders said. The rates ranged between 3-6.5 percent in Asia on Wednesday.

"Counterparty risks still remains and that has blocked the lending by banks as risk aversion persists," said Suresh Ramanathan, a strategist at CIMB Investment Bank in Kuala Lumpur.

Last month, overnight dollar rates shot up to 10 percent in Asia, spurred by the high-profile collapse of Lehman Brothers (LEHMQ.PK: Quote, Profile, Research, Stock Buzz).

The U.S. Federal Reserve cut its benchmark interest rate by half a percentage point to 1.5 percent, and China, the European Central Bank and central banks in Britain, Canada, Sweden and Switzerland followed suit. [ID:nL8116323]

The coordinated rate cuts were the latest salvo from policymakers in response to the financial crisis that has forced commercial banks to hoard cash, rather than lending to each other.

On Thursday, three month dollar rates held steady between 4.3 and 5.5 percent in Singapore and were moderately higher in Kuala Lumpur, traders said. (Reporting by Kevin Yao; Editing by Anshuman Daga)

© Thomson Reuters 2008 All rights reserved

Leave money where it is, or try safe alternatives

By DAVID GELLES

dgelles@MiamiHerald.com

``Turn off the TV.''

That's the advice financial planner Harold Evensky is giving to skittish clients concerned about their dwindling investments amid the financial crisis.

''I know no one likes to hear it, but the answer is, hang in there,'' said Evensky, a partner in Coral Gables wealth management firm Evensky & Katz.

By selling stocks now, Evensky said, investors could exacerbate their financial problems. U.S. stocks fell again Friday, ending a volatile week that was the worst for the Standard & Poor's 500 Index since the 2001 terrorist attacks.

''All investors say I want to buy low and sell high,'' he said. ``What happens at times like this, in hindsight, is that investors wind up buying high and selling low.''

Nonetheless, the ongoing credit crisis, bank failures and a plunging stock market have conservative investors looking for safer places to park their money.

At this point, they're not so concerned about making money as just not losing money.

Among the options for those simply looking for security are bonds and certificates of deposit, or FDIC-insured savings accounts. All are very secure, but none pay high interest rates.

Of course, individual investment strategies are case-specific, and what makes sense for a young professional might not work for a retiree. Some investors may need to adjust their portfolios to take care of short-term needs; others may be in a position to wait it out until the market recovers.

''It comes down to identifying your time frame,'' said Chip Bender, president of Fiduciary Financial Consultants, a Miami financial advisory firm. ``If you're looking at a two-year time frame, you want to be weighted towards fixed income. For that, there's only one place to go, and that's the Treasury.''

For example, short-term U.S. Treasury bills that mature in less than a year are regarded as extremely safe, but they don't pay much. Longer-term Treasury notes and bonds mature later but offer better yields.

Investors flocking to the safety of Treasury bills last week caused the yield on three-month T-bills to plummet to less than one percent, a sign that investors would rather make no money at all than risk holding investments that might depreciate. The three-month T-bill started the year with a 3.26 yield. By Friday, it had dropped to 0.63 percent.

Muriel Siebert, the Wall Street veteran whose eponymous brokerage firm has several South Florida locations, said investors who need short-term fixed income, such as retirees, should at least partially divest their stock portfolios.

''Sell enough of your stocks and buy municipals, so you have your basic expenses covered tax-free,'' she said. Municipal bonds are tax exempt, but have lower yields than Treasury or corporate bonds.

One local investor, Linda Dunn, 59, has begun following a more conservative investment strategy. Dunn, a recently retired schoolteacher from Coconut Grove, invested for the first time this summer, and was aiming for a traditional 60-40 split between stocks and bonds.

But as the financial crisis swelled, Dunn and her financial advisor, Cathy Pareto, decided to move away from stocks. ''We decided it would be better to be much more conservative,'' Dunn said. ``There's just so much going on with the economy.''

Dunn now has 50 percent of her investments in short-term domestic and global bonds, 25 percent in a money market account with Charles Schwab and the remaining 25 percent in the stock market.

The return on her bonds is only 2.4 percent, but for now, simple peace of mind is valuable to Dunn. ''I'm comfortable now with where I am,'' she said. ``I feel like my money is protected.''

Others are choosing to get out of the markets altogether. Joan Kobren, 69, said she and her husband sold their mutual funds last week and put the money into a savings account. Their broker wanted to reinvest the money in the stock market, but Kobren protested.

''We're just keeping it put until we see what's happening with the economy,'' she said. ``It's our life savings. We're not investing for the long-term.''

Those seeking safety also might want to consider U.S. Treasury bonds, which mature in 10 to 30 years and have retained their yield rates this year. The yield on the 10-year Treasury bond started the year at 3.91 percent, and on Friday was at 3.85 percent.

Bender also recommended zero coupon bonds, which don't pay interest, but are redeemed for a higher value than their sale price at the maturity date.

For others, who don't need fixed income from their investments for the next few years, there may yet be ways to make money.

''You never want to be totally out of the stock market,'' said Jeffrey D. Saut, chief investment strategist for Raymond James. ``Look for clean balance sheets, decent fundamentals and good dividends.''

Saut said blue chip stocks are safe bets, along with stocks of already strong companies that show growth potential, such as Chesapeake Energy and Alaska Communications.

Michael O'Higgins, a Miami Beach investment manager and author of the 1991 book Beating the Dow, said now that share prices have come down it's a good time to invest aggressively. ''This is not the time to be looking for safety,'' he said. ``This is the time to be aggressive.''

Chip Bender said even some of the companies in the middle of the financial crisis could make for good investments. ''For the longer term investors, there's a tremendous opportunity,'' said Bender.

For example, Bender pointed to Bank of America, which has seen its stock slide this year, but also has acquired Merrill Lynch. ''Think of the size of that company coming out of this,'' he said.

For the investor with a five- to 10-year horizon looking for income and relative safety, a better idea right now might be an exchange traded fund that invests in high-dividend stocks, said Joseph Nader, managing director of Zenith Capital Partners in Coral Gables.

ETFs are similar to mutual funds in that they invest in a pool of stocks. Some ETFs emphasize stocks that pay dividends, which generally means mature, established companies.

Nader has been recommending that his clients consider an ETF called iShares Dow Jones Select Dividend, which trades under the ticker symbol DVY. The fund invests in the 100 stocks of the Dow Jones U.S. Select Dividend Index. They're basically the stocks that pay the highest dividends.

Nader figures the dividend yield will be around 5 percent per year, while the value of the shares themselves should increase in the long term.

But for investors who insist on something really safe, O'Higgins suggests certificates of deposit. CDs are guaranteed by the government as long as the investor stays under FDIC limits. And yields can be as high as 4 to 5 percent for longer term CDs.

Pembroke Pines resident Morris Rosenberg, 80, said he was a longtime investor in CDs and wasn't changing a thing because of the crisis. ''They're consistent, and there's good interest,'' he said.

''I would go to my nearest bank and buy CDs and tie up your money for however long you feel comfortable'' is O'Higgins advice. ``They're FDIC insured. They're backed by the federal government, and the federal government has a printing press.''

Yet some worry that inflation could be the next economic hurdle.

''Even cash is risky,'' said William Neubauer, a financial planner in Coral Gables with Comprehensive Money Management Services. ``Because of inflation, you could suffer a significant loss.''

For one distressed client, Neubauer sold half his stock portfolio. But instead of simply liquidating to cash, the client used that money to pay off the entirety of his mortgage. ''At least he owns his house,'' said Neubauer.

But for all the uncertainty, many advisors suggest that those who can simply wait out the storm, should. ''The market goes up just as fast as it goes down,'' said Evensky. ``This is when really good investors come through.''

Muriel Siebert, who in 1967 became the first woman to own a seat on the New York Stock Exchange, said that while the past two weeks have been unprecedented, she isn't too concerned. ''I haven't lost faith in the financial system,'' she said. ``The system is good.''

Miami Herald staff reporter Scott Andron contributed to this report.