Processing fee change would hand Walmart, Disney millions while pinching small business

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Legislation ready for a floor vote in the Senate and House could stick it to small businesses while boosting bottom lines at their big box competition.

Sponsored by Sen. Travis Hutson and Rep. Mike Caruso, the bills (SB 564, HB 677) would exempt credit card processing fees from state sales tax, which would save sellers a few pennies per sale, at least on paper.

Known in the financial industry as “interchange fees,” the cost typically falls in the 1% to 3% range and applies to the total transaction, including sales tax, which Hutson has described as a “tax on a tax.” But small businesses and the processing companies that cater to them say the broad strokes summary glosses over many facets of the complex payment processing industry.

While it’s true that interchange fees fall somewhere between 1% to 3% on the macro level, they are not one-size-fits-all. Two people who run small payment processing companies told Florida Politics interchange fees vary wildly, can change on a whim and that only a minuscule portion of them can be chalked up to convenience.

One Gainesville-based CPA who owns a payment processing company told Florida Politics it would be “impossible” to give a defined rate. “Interchange is never flat. It’s dependent on so many things that change daily. Even inflation and bank rates make a difference,” he said.

Other influences include the card network, the region of sale and whether the card was swiped or keyed in. A business’ industry code plays an outsized role as well. Restaurants, for instance, pay significantly higher interchange fees than most other businesses. If you’ve ever wondered why the waitstaff circles back to say “sorry, we don’t take American Express,” but the utility company doesn’t, there’s your answer.

Compounding this is the number of entities that can claim a piece of that fee. Interchange providers are few in number and mostly operate on the business-to-business level. First Data, which handles about half of all credit and debit card transactions in the United States, simply isn’t going door-to-door selling its services.

Small businesses instead deal with “independent sales organizations,” or ISOs. That’s an industry designation that describes most public-facing payment processors, such as banks, credit unions or techier brands that market plug-and-play card readers, such as Square.

ISOs partner with interchange providers and repackage their services at a premium, similar to the prepaid cell carriers that are underpinned by one of the “Big Three” phone networks. Likewise, ISOs differentiate themselves with value adds, such as providing customer service, assuming fraud risk and developing point-of-sale software suites that allow small businesses to accept cards without worrying about the minutiae of how many basis points are owed to each stakeholder.

The software side is what’s causing heartache among the Florida bill’s opponents. The legislation would enforce the exemption by fining processing companies each time they collect interchange fees on the sales tax portion of a receipt. The threat of a $1,000-per-violation fine forces the hand of processing companies, which would need to develop new software and roll it out across millions of point-of-sale devices.

That’s assuming a device has software capability. Most systems send processors a transaction total and nothing else. Because it’s “blind,” there are many POS devices in the wild that are less complex than an off-brand graphing calculator.

The time, labor and hardware costs involved in developing software and replacing deprecated POS systems would inevitably be passed on to businesses, which would be forced to either eat the cost or shift the burden onto consumers through higher prices.

But this convoluted chain goes out the window for companies such as Target, Kroger and especially Walmart, which is supporting Hutson’s and Caruso’s legislation in Florida and is backing near-identical measures in at least 25 other statehouses nationwide.

When it comes to interchange, Walmart is as close as it gets to being vertically integrated. The company has robust fraud mitigation systems and operates as an issuing bank through its in-store MoneyCenter brand. The company also has an in-house software development team able to design point-of-sale software that’s employee-friendly on the surface but as intricate as a Swiss watch under the hood.

These in-house advantages are only viable for Walmart and other multibillion-dollar companies, where paying an additional 20 basis points (0.2%) to an IOS would amount to tens of millions of dollars in lost revenue. The company’s scale also allows it to pay substantially lower interchange fees to begin with, since anomalies like chargebacks are smoothed out over the course of several million transactions.

The thrust behind SB 564 and HB 677 is the big box retailers’ desire to pocket a fraction of a cent more on each sale — on paper, exempting a 3% interchange fee on Florida sales tax, which currently sits at 6%, would save sellers about a dollar for every $550 in sales.

But those fractions of a cent can add up. Steve Rauschenberger, a former furniture retailer who represents the Electronic Payments Coalition, told members of the Senate Rules Committee this week that Walmart “would see a monthly windfall of almost $400,000” if SB 564 becomes law.

While Walmart has point-of-sale software ready to go with the flick of a switch, it’s not looking to share it with other businesses, which would need to shell out for compliant software. In effect, Hutson’s bill dumps the “take a penny” tray at every corner store in the state into a Walmart exec’s pocket.

The bill would also be a handout to Disney, which has otherwise been the Legislature’s whipping boy this Session. Rauschenberger told Senators that “on ticket sales alone” the theme park giant would earn an additional $500,000 a month. In response, Hutson floated the idea of specifically excluding Disney, a new favorite pastime among Florida’s elected officials, which Rauschenberger said would only further complicate an already complicated bill.

“I’m from Illinois. You can help Disney, hurt Disney, run them over, you know, I don’t care. I actually like Bugs Bunny better than Mickey Mouse,” he said.

“I just need you to know it’s your store where you get your coffee in the morning. It’s not the small restaurant that benefits, for the most part, from this bill. It’s large retailers that benefit from it, or large sellers. That’s my only point. It’s easy to name Walmart, Home Depot and Disney because their numbers are available publicly.”

SB 564 advanced through Rules on a 15-4 vote and now heads to the chamber floor. HB 677 cleared its final committee stop on April 12 and is currently on second reading in the House.