The Interchange Change

Retailers and other Merchants have long been plagued by increasing costs associated with taking credit card payments without reasonable control over the expense of those payments. There is now a proposed settlement in a long-standing price fixing lawsuit between Visa/Mastercard and retailers that may change the playing field. Here is what you need to know.

Background

Retailers and “merchants” of all sorts that accept credit cards as a form of payment have to pay an interchange fee every time a credit card is used to pay for purchases. This fee varies, but can be as much as 3 – 5% of the transaction cost. Larger merchants, like Target and Walmart, can often negotiate a lower fee. The interchange collected is then split between many providers including; the card issuing bank, the credit card company, the merchant’s bank, the credit card gateway provider, and any other distributors.

The Problem

The merchants in this system are often powerless at controlling their costs. Why?

Checkmark Merchants cannot differentiate. If they accept a card, like Visa, they cannot charge you any extra for using the card. So if a customer who pays with a Visa costs a merchant 2% more than someone who writes a check, the merchant cannot pass that additional cost on to the customer.
Checkmark Prices are not fluid. Banks are the historic owners of Visa and Mastercard, and the pricing models used are very inflexible. In other words, according to many merchants, the credit card pricing is fixed between providers.
Checkmark Losses flow downhill. If there is a problem with the credit card transaction, often the merchant is the one taking the loss. Why? The credit card banks have auto access to the merchant’s bank account and if a disputed claim is ruled against them, there is little practical recourse other than to accept the loss.
Checkmark Rewards cards become penalty cards to merchants. If you use a credit card with a rewards program, the merchant is the one who foots the extra cost. Theoretically, two customers could use the same type of credit card (Visa, Mastercard, American Express), but the credit card cost to the merchant can vary depending on the reward program attached to the card.

What is Happening Now

In a recent class action lawsuit, merchants have challenged Visa/Mastercard over their business practices claiming price fixing. The merchants wish to recapture some of their pricing authority. If the proposed settlement is accepted:

Circle Participating Merchants will share in a $6+ billion settlement payment.
Circle Merchants will be able to add a fee if you use a Visa or Mastercard to pay your bill, as long as you are located in a state that does not prohibit a credit card surcharge.
Circle Merchants will see a .10% drop in their credit card rate for a 6 – 9 month period of time.

Why Care?

Ultimately, merchants must pass the cost of these credit cards on to the consumer. Here are some ideas to use this information to your benefit:

Circle Negotiate cost. If purchasing an expensive item, offer to pay cash for a discount. If it is a small merchant you might suggest a 1 – 3% discount to share in the interchange savings.
Circle Be aware of surcharges. Given the nature of the settlement, it is unlikely that large retailers will be adding credit card surcharges, but smaller retailers might do so. Please be aware of the store’s policy before you buy.
Circle Leverage your credit card costs. Being aware of the interchange profits being made on your credit card provides you negotiating leverage on your credit card bill. Remember, your bank is making money every time you use your card, even if you pay your bill in full each month. Consider challenging a late fee or credit card interest on a late payment.

The IRS Collects $2.2 Trillion in 2012

Each year the IRS releases a Data Book that recaps Internal Revenue Service activities for the prior fiscal year ending in September. The 2012 Data Book was recently published which recaps the 2011 tax year. Here is what you need to know:

Checkmark The $2.2 trillion in gross revenue collected was up 4.3% from the prior year
Checkmark $1.3 trillion of the revenue collected came from individual income tax returns
Checkmark 2 million notices were sent out involving 2.7 million math errors on tax returns
Checkmark Approximately 1% of all individual tax returns were audited
Checkmark Automated programs yielded over $13 billion in additional tax assessments

Of specific interest was the data that recapped two of the major automatic programs in place at the IRS; the Automated Under Reporter Program and the Automated Substitute for Return Program.

Automated Under Reporter Program

Circle Description: This is the IRS computer program that compares information returns (W-2s and 1099s) provided by third parties with the information provided by taxpayers on their tax return. If there is a mis-match, the program automatically sends out a form to have you explain the difference.
Circle Results: The 2.2 billion information returns received by the IRS identified 4.5 million discrepancies resulting in $7.1 billion additional tax assessments.
Circle Action: This program is an efficient way for the IRS to find missing revenue. Make sure you receive all your information forms and that the information stated on them is correct. Errors can be corrected on your tax return, but it is always best to get your employer or provider (bank, brokerage or customer) to issue a corrected 1099 or W-2 form.

Automated Substitute for Return Program

Circle Description: This is the IRS computer program that uses third party information and automatically creates a tax return with that information if you do not file one.
Circle Results: This program identified 803 thousand non-filed tax returns. The created returns yielded an additional $6.7 billion in tax assessments.
Circle Action: If 1099s or W-2s have been issued, the IRS expects you to file a tax return or will do it for you if you don’t. While it is possible that this might create a refund, do not expect the IRS to grant you all your available deductions. It is always best to file a return, or file an extension if needed to provide some time to get your information to them.

The IRS Data Book is loaded with useful information. Next month: What is your chance of being Audited? A look at updated IRS audit information.

As always, should you have any questions or concerns regarding your situation please feel free to call.