January 3, 2011

Will that be cash or credit?


Many businesses these days could not keep their customers without accepting plastic. As much as 75 per cent of retail garden sales are transacted with credit or debit cards, according to Anthony O’Neill, chair, Garden Centres Canada (GCC) and owner of O’Neill’s Gardenland in Spaniard’s Bay, Nfld. While cheques are still the most popular form of payment with landscapers, this might change. “I really hate paying by cheque and I don’t expect my customers to,” says James Summers-Gill, landscape designer and owner of Creative Reflections Landscaping in Kelowna, B.C. “Credit cards are convenient. They help people to manage their cash flow. I find that customers are quicker to fork over that deposit for a landscape project with a credit card than if I insist on a cheque.”

Credit card transactions are more secure than cheques because the issuing bank agrees to pay the merchant the moment the card transaction is authorized (except for legitimate disputes, which can result in charges back to the merchant). However many in the horticultural trades are unhappy with what they consider unfair fees imposed on merchants by the credit card industry. The result, according to O’Neill, is that businesses who accept credit cards are raising their prices across the board in order to cover the fees.

Some firms have stopped accepting credit cards altogether. At garden centres, “fewer and fewer of our suppliers allow us to pay with credit cards,” O’Neill says. “This is a problem because we buy our plants a month or month-and-a-half before we start selling them. If we pay by credit card, that gives us up to 30 or 40 days to keep a good cash flow before we sell them. Now, with our suppliers not accepting credit cards, we lose that cash flow.”

In recent years, thousands of businesses across Canada have protested the fee policies and practices of the credit and debit card industries, resulting in a review by The Standing Senate Committee on Banking, Trade and Commerce. The Committee’s report, issued in June 2009, prompted the federal government to install a Code of Conduct for the Credit and Debit Card Industry. Enacted in August 2010, the code is voluntary, but those who adopt it are required to abide by it. To date, the code has been adopted by all payment card networks. Here’s a roundup of merchants’ concerns and how the Code addresses them:

Premium card pain
The increased use of premium credit cards started the avalanche of merchant protests. These gold, platinum, corporate and other seemingly prestigious cards offer lucrative travel and other rewards for consumers, but the merchant transaction fees associated with them are higher than those of regular Visas and MasterCards; as high as three per cent of the sales transaction. The Canadian Bankers Association told the Standing Senate Committee that what it called true premium cards — those entailing higher interchange fees — represent about nine per cent of all bank credit card accounts. However, merchant lobby groups, such as the Canadian Federation of Independent Business (CFIB) and the Stop Stickin It To Us Coalition (headed by the Retail Council of Canada), accused the payment card industry and issuing banks of flooding the market with premium cards. In the Senate Committee’s report, the Coalition stated that the proportion of credit card purchases made with premium cards at one of its larger member’s stores increased in one year from 0.7 per cent to more than 35 per cent. Merchants are compelled to accept premium cards because of Visa and MasterCard honour-all-cards rules.

Sometimes a consumer’s spending habits will automatically upgrade his or her credit card to premium status, without the consumer’s knowledge. “The card looks the same — the consumer doesn’t actually know anything is different — but the card automatically becomes a high-spend card and the merchant ends up getting charged the higher fee,” Dan Kelly, CFIB’s senior vice president of legislative affairs, told Landscape Trades.

Under the new Code of Conduct, the card industry may now only issue premium cards to consumers who apply for and consent to them. Moreover, the Code requires that cards must be targeted at individuals who meet specific spending and/or income levels. The CFIB and Coalition believe that suitability for premium cards should be determined by income, not spending pattern. In many cases, premium cards are issued to low- and middle-income families, they argue. Adds GCC chair O’Neill, “We have not seen a correlation between premium cards and increased spending at garden centres. In many cases, the premium cards don’t even give the consumer a higher credit limit!”
De-mystifying fees
Beyond the higher fees associated with premium cards, merchants have complained about unexpected and incomprehensible fees on their monthly credit card processing statements. A 2009 survey conducted for the CFIB revealed that 68 percent of 7,198 small- and medium-sized business respondents had difficulty understanding their credit card fees. Phil Fluit, retail manager at Sunshine Express Garden Centre in Niagara-on-the-Lake, Ont., warns of extra fees when you manually key in a credit card number instead of swiping the card. He got hit with such fees when processing card transactions taken over the telephone. There may also be added fees when credit card payments are processed over the internet, adds CFIB’s Dan Kelly, because card processing companies consider phone and Internet transactions riskier than in-person transactions.

The new Code requires card networks to work with merchants to “ensure that merchant-acquirer agreements and monthly statements include a sufficient level of detail and are easy to understand.” The code also requires card networks to “ensure that merchants will receive a minimum of 90 days notice of any fee increases or the introduction of a new fee related to any credit or debit card transactions.” Since it might take some time for card networks to clarify their paperwork, it pays to plough through your card processing statement, contact your card processor and ask him to explain the purpose of the charges that show up.

Reducing card processing costs
Although the new Code did not embrace all of the Standing Senate Committee’s recommendations, such as allowing merchants to refuse certain credit cards or to add a credit card surcharge, it does contain provisions that might help to lower your processing costs. For example, merchants may now offer discounts for lower-cost forms of payment — cash, debit or lower cost credit cards — without being dropped or otherwise penalized by their credit card network.
Additionally, card networks must ensure that following notification of a fee increase or the introduction of a new fee, merchants will be allowed to cancel their contracts without penalty. This opens up opportunities for negotiating fees with your present card payment processor or switching to another firm.

As the new Code takes effect, expect to see changes in the way that credit card networks and banks market their products. Deloitte, a national financial advisory services firm, has predicted that loyalty programs will increase significantly between card issuers and retailers.

Such a program has been negotiated already between the Canadian Nursery and Landscape Association (CNLA) and the national card processor, Chase Paymentech. The program offers CNLA members lower-cost merchant fees (1.66 per cent for Visa and 1.74 per cent for MasterCard), waived application fees, competitively-priced point-of-sale terminals, deposits to your bank of choice without additional charges and flexible gift card programs suited for businesses of any size. For further information, call 1-888-317-9532 or visit www.chasepaymentech.ca.

Landscape designers, design-build firms and others who make big ticket sales to consumers might benefit from offering their customers an alternative to managing their cash flow with a credit card. By spring 2011, a new financing program will be launched through a partnership of the CNLA and RBC Bank’s Home Renovation loan program. According to Joe Salemi, CNLA’s member services manager, the program will allow businesses to offer their customers $40-50,000 worth of credit at a preferred interest rate. “It’s a perfect fit,” he says. “There’s no cost to the landscaper, garden centre or other business. They get paid up front. Plus an attractive borrowing rate for the consumer. Not zero financing, but closer to line-of-credit interest rates.”

Although consumers’ love of premium cards may have some selling advantages, such as, “reminding a potential customer who is considering a $30,000 landscape project that the card points she earns from the project will get her a free patio set,” according to James Summers-Gill, most businesses would be more inclined to educate their customers about the benefits of lower-cost payment methods.

Dan Kelly says the CFIB is exploring ways to educate consumers about the cost of credit cards, such as posting signs that say, Are you aware that Visa or MasterCard costs my business a lot of money? Would you be willing to pay with your debit card or with cash? Kelly says, “Consumers are completely unaware that when they use their credit cards it’s the merchant who pays the bill. They think it’s consumer interest charges and the annual fees they pay for the card, but the vast majority of dollars that are in the credit card industry come from merchant transaction fees.”       

Keeping debit transactions affordable

Debit card transactions via Interac Direct Payment (IDP) are hugely popular among Canadian consumers and merchants. In fact, Canada has the second-highest level of debit usage in the world, after Sweden. Consumers trust IDP because their bank accounts are protected from unauthorized access and their liability is limited in the event that funds are taken without the account holder’s permission. Merchants like it because it’s the lowest-cost method of payment to a merchant.

A 2008 Bank of Canada survey reported the median per-transaction fee for debit cards is 12 cents. Using a $36.50 base case transaction, the Bank calculated the variable per-transaction costs to the merchant at $0.19 for debit cards, $0.25 for cash and $0.82 for credit cards.

As well, IDP payments are guaranteed and irrevocable, “one of the reasons debit cards are rated by merchants as the least risky payment method to accept,” stated the Stop Stickin It To Us Coalition’s submission to the Standing Senate Committee. “The irrevocability of debit card transactions is unlike the policies of Visa and MasterCard organizations, that force merchants to accept a chargeback of a credit card transaction up to several months after the transaction is completed in the store.”

When Visa and MasterCard announced plans to bring their own debit products into Canada (e.g.Visa Debit and MasterCard Maestro), merchants feared that all debit fees would rise once the foreign card giants gained control of the market. Says Ruth Thorkelson, vice president, public affairs, Retail Council of Canada, “In the U.S. and Europe where Visa and MasterCard have introduced debit — the debit fees are increasing.”

Adding to this concern was a negative optioning tactic which attempted to automatically enroll merchants in the new Visa Debit program, unless they took action to opt out. Merchants also worried about proposed co-badged debit cards that can have access to more than one debit network on a card, such as Interac and Visa Debit or Interac and Maestro. According to the CFIB, MasterCard had plans to install priority routing, which would cause all debit transactions to automatically be routed through the Maestro network (instead of Interac) once the merchant’s machine was programmed to accept it.

Under the new Code of Conduct for the Credit and Debit Card Industry, merchants scored a clear victory. It prohibits negative optioning and priority routing. It also prohibits debit and credit card functions on the same card, as occurs frequently in the U.S. Additionally, merchants no longer have to abide by the honour-all-cards rule when it comes to debit. So merchants who accept Visa or MasterCard credit cards will not be obliged to accept their debit cards.   

Susan Hirshorn is a Montreal-based writer, editor and communications consultant.