Small retailers bear brunt of payment card charges

Some interesting documents have fallen across the desk of this past couple of weeks that have highlighted how small retailers are being given an increasingly hard time by their banks.

The way the banks like to keep it

The first came from a small merchant, with annual revenues of less than £1 million, which listed the various fees the company is charged for each of the transaction types it accepts – debit card, credit card and cash etcetera.

The key figure in the document is the 28p it is charged by its bank for accepting debit cards, which is significantly higher than that of larger retailers who face an average charge of 11p per debit card transaction.

The banks have long argued that this differential is a result of them passing on the interchange fees – the charge administered between each of the banks for accepting card-based transactions.
However, this argument has been long flawed as the interchange charged is exactly the same irrespective of the size of the merchant. The banks should at the very least come clean and admit that they are charging small retailers three to four times more than for larger merchants.

It is clear they are making a lot more profits from their dealings with smaller operators. Taking the universal interchange fee of 8p for debit cards then the profit to the banks is 28p minus 8p, which equals a chunky 20p per debit transaction.

This is in contrast to only 3p of profit for a debit transaction accepted by a big retailer – 11p minus 8p.

If this sounds like a rough deal for small operators then things could be about to get a whole lot worse because the second letter to come into the hands of signals the fact interchange fee are to be significantly increased.

Most retailers will have received a copy of the letter, which highlights that for debit card transactions that the interchange fee will increase by a sizeable 37.5%.

The implication is that card transaction fees will go up because the banks will not want their margins eroded. Needless to say it wouldn’t be any surprise to find the smaller merchants ultimately end up getting a much rawer deal than their larger counterparts.

Debit cards are the main substitute for cash, which retailers have long been sold the story that it is a much more costly payment method to handle than plastic. The reality is that this is untrue.

Cash: not the most expensive option 
Contained within the document from the small retailer is the interesting item that indicates it is charged 60p for every £100 of its cash that is handled by its bank. Performing a simple calculation for 10 debit card transactions valued at an average of £10 each (a total of £100) the transaction charges to the retailer would be £2.80.

This compares with only 60p of banking charges if this same £100 had been accepted by the retailer as 10 transactions accepted in the form of cash.

Based on this stark evidence it is clear that the banks and card schemes have been misleading retailers into thinking the cost of collection of cash is more expensive for retailers than the charges relating to debit cards.

The disappointing side of this is that the government has sought to promote small businesses but it has consistently done little to help in the case of unfair transaction charges for small retailers.

In fact it could be argued that they have actually done the complete opposite because they continue to promote the use of plastic – hence the drive by the government to transfer all benefits payments onto plastic cards.

This must be music to the ears of the banks but will no doubt result in yet more misery for the small retailer as accepting payment from such cards will again cost them more in fees than for the equivalent cash transaction.