Interchange fees often take the spotlight in discussions about card acceptance costs, but they are just one of many factors in the increasingly complex system that determines the price merchants pay for taking plastic cards.

The cost of card acceptance incorporates numerous fees on top of interchange, including those for processors, acquirers, network access, compliance and statements.

"There is a lot of chaos in pricing and a lack of transparency, making it impossible to reconcile at the merchant level," says Brian Riley, senior research director and analyst with Needham, Mass.-based CEB TowerGroup. "Interchange is only the tip of the iceberg."

Merchants didn't need a degree in analytics to figure out their card processing costs 25 years ago because they knew it was going to average between 3% and 3.5% to accept card payments, says Bob Baldwin, vice chairman of Heartland Payment Systems Inc., a Princeton, N.J.-based processor.

To encourage banks to more card issuance and acceptance, the card networks introduced different interchange fees for different cards, starting in the 1990s, Baldwin says.

The result has been "a very complex" payment processing world, Baldwin adds.

The Durbin Amendment, established in October of 2011, was supposed to provide some clarity by capping interchange rates on debit transactions, but the amendment went after the wrong target, Riley says.

"Here we are, post-Durbin by 18 months, and the fee structure is no less confusing than when it started," Riley says.

The Durbin Amendment of the Dodd-Frank Consumer Protection Act capped interchange rates on debit transactions at 21 cents, plus a few cents for issuers to cover other costs, from its previous average of 44 cents on cards issued from banks with more than $10 million in assets.

Card networks establish interchange rates, which are paid by a processor's bank to the card-issuing bank. Models for tiered, bundled, or interchange-plus pricing simply add to the confusing mix for merchants, says Richard Crone, chief executive of San Carlos, Calif.-based payments consulting firm Crone Consulting LLC.

Tiered pricing establishes different rates for different cards or payment methods. For example, a merchant keying in a credit card number, rather than swiping it through a reader, pays more. Interchange-plus eliminates tiers and sets a standard fee, or a basis points system, added to interchange. If a processor charges 30 basis points, it is charging 0.30% on top of interchange.

Heartland offers the interchange-plus model as an alternative to tiered pricing. Generally, under tiered pricing, each processor could have different rates as well as different ways of defining the tiers.

For an average card payment of $100 processed through Heartland, about $97.50 goes to the merchant and $1.87 to interchange. The card networks get 13 cents for access and transaction fees, and Heartland gets 50 cents as processor, Baldwin says.

"But that equation changes for each different transaction and each different card," Baldwin says, illustrating how difficult it is for merchants to fully grasp their POS remittance costs.

"Merchants like to see the simplicity of interchange-plus, but it can still be a complicated process," Baldwin says.

Merchants must be more analytical about their processing costs, Baldwin says.

"Merchants have a vague dissatisfaction with fees, but if they get a big bill, they throw it in a drawer to pay later," he adds. "There is not a lot of cost-benefit analysis going on."

Mostly, small merchants are in no position to analyze their payment processing statements to ensure they are receiving the best rates possible on the various card transactions, Crone says.

"I have seen merchants with sales at $500 million annually not actively managing their mix at the point of sale and not looking at their transaction charges closely," Crone says.

Smaller retailers should steer clear of tiered or bundled pricing and move to a per-transaction fee and pay for a company specializing in payments to determine the mix of transactions occurring at the terminals, Crone says.

"You get what you measure," Crone adds. "You can never benefit if you are not studying the least-cost in transaction processing or even the debit routing options established through Durbin."

Part of the Durbin Amendment calls for providing merchants with more than one option for routing debit transactions, as a way to choose a less expensive option.

The pricing structure of interchange and various other fees is "unnecessarily and intentionally" complex, says Mark Horwedel, CEO of the Merchant Advisory Group.

"Small merchants are subject to many market abuses stemming from their lack of access to skilled payments professionals who could help them wade through the payments morass," Horwedel says.

Merchants often pay far higher fees because of the lack of transparency of the payments system. "Cost-plus and simple-discount processors have helped alleviate some of their pain," he adds.

The chaos of card-acceptance costs stems largely from the fact that "the processing market has competition for merchant business," says Doug Kantor, a lawyer representing the National Association of Convenience Stores in the antitrust swipe-fee case against Visa and MasterCard.

However, the interchange rate does not factor in competitive back-and-forth that is necessary for a market to function, Kantor says.

The swipe-fee litigation and subsequent complaints about the pending fee settlement unfolding in New York District Court stems from interchange fees as an antitrust problem, Kantor says.

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