Thursday, July 31, 2008

Processing Costs of Prepaid May Reduce Retailer Profits

When prepaid cards are used in conjunction with other methods of payments for the same transaction, retailers may end up actually losing money on the sale according to this article from American Banker. The problem arises when customers are unsure of the remaining balance on their cards. As a result, cashiers may have to ring up a card several times to determine the balance remaining. For each of those transactions, even if denied, may result in an interchange fee. Mallory Duncan, Senior VP for National Retail Federation noted that

"The profit margin in the retail industry is extremely narrow. The average after-tax profit of the average retailer is about 2%, and for some it's less. In the grocery store arena, it's about 1%, so if you start adding on fees, you're actually losing money."

Compounding the problem is the high turn over rate for the retail industry, leading to increased training costs in the proper way to handle such scenarios. To combat this problem some companies, such as American Express are informing consumers on their websites that

"Some retailers, particularly department stores, will only allow a 'split tender' transaction if the second form of payment is cash or check."

Mr Duncan also notes, however, that there is a simple solution by simply upgrading the system. As the prepaid industry grows, companies may have to just face the costs of the upgrade in order to keep up with the latest trends.

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