Credit Union Collaboration

Managing the high cost of credit and debit card transactions has been plaguing our industry over the past several years. Not only are transaction fees rising annually for retail operators, merchants aren’t getting much benefit. According to a recent article in Progressive Grocer Magazine, “processing” debit/credit cards comprises 13 percent of interchange costs, while 44 percent of those costs are embedded in rewards programs. While customers see convenience (as well as pass-through costs), merchants get virtually nothing in return from these programs. Consumers in turn are getting a flood of credit card offers as this big business continues to thrive.

At Outpost Natural Foods Cooperative, we’ve seen credit card processing expenses increase as a percent of total sales, from .75 percent only a few years ago, to well over 1.2 percent today. The use of credit or debit cards at our stores has risen to 67 percent of all transactions—a number that was only 65 percent just four months ago. Attempting to manage those transaction costs through rate negotiations or new service providers no longer has an impact in controlling that expense for us. Persuading our shoppers to use other forms of payment hasn’t seemed like a good option in the past, and in face of the recent flood of competition in our market, doesn’t seem like a good option now.

What’s a co-op to do? We took a look at this issue from a slightly different perspective back in 2005, during our expansion to a third store. A year prior, we began to form a relationship with a local credit union, since we were interested in having a branch location within our new retail store. We knew we didn’t want merely a credit union tenant—we wanted a partner with whom we could promote the benefits of co-ops through both of our businesses. Today, through that partnership we promote the credit union to new Outpost owners, and the credit union promotes our business to all branch members through its newsletter and in its business. We allow the credit union to use our store community room to conduct financial seminars and to hold its staff meetings and trainings. Oh, and in addition—we partnered on creating a co-op credit card that provides funding of our educational programs.

The Outpost Visa Card was created out of this partnership with the Brewery Credit Union here in Milwaukee. Our vision was to create a credit card using the strong brand identity of Outpost that would bring benefits to the co-op and ultimately to our community. I refer to this program as a true partnership, since Brewery Credit Union was willing to forgo the majority of the rebate it would receive as a sponsoring financial institution of this card. Outpost made the commitment, in return, to use the rebated funds to sponsor our current educational programs and create new programs in the future that would benefit our community.

The program itself is referred to as an “affinity card,” which is a partnership of a nonprofit cause (education) and a financial lender. Outpost receives a 1 percent rebate on all purchases and balance transfers made to this card. The credit union, in return, settles for a much smaller rebate and sponsors this card with fair annual percentage rates, well below the high APR of many other credit cards. And while the money is designated towards our educational efforts, in reality it does help to offset the transaction charges we incur, especially if the card is used at Outpost! I also like to promote the use of the card as a guilt-free way for anyone shopping our competitors or dining out, as it does return money to Outpost each time it is used.

In the seven months since the Outpost Visa Card became available in 2006, we have enrolled 56 people and have been rebated $2,500. We’re currently designating those funds to supplement the costs of our brochures and flyers, free workshops, and our nutritionist services. We anticipate creating new programs in the future as the funding increases—supporting programs such as sustainable agriculture, education in our schools, and nutritional programs for low-income families (to name a few).

In 2007 we have several promotions planned to increase the number of enrollees in the Outpost Visa Card program, including rewards from Outpost and Brewery CU for new enrollees and incentives for current enrollees to get friends or family members to sign up for cards of their own. The program takes commitment, on our part as well as the credit union, to get into our businesses and talk to our member/owners about how this card is intended to really make a difference in our community.

Our goal is to enroll double the participants (56 additional people) in 2007 and increase our annual rebate to $5,000. While that won’t pay all the educational bills, we believe it makes a difference in the hearts and minds of our owners, wherever they may shop.

Steering Consumers
The Wall Street Journal reported on January 16, 2007, that there is a small but definable movement on the part of retailers around the nation to encourage their customers to use PIN-based debit cards with low transaction fees instead of higher-fee signature-based debit cards:

“Fed up with the rising cost of accepting plastic, a growing number of merchants are taking matters into their own hands. In the industry, the practice is known as “steering”—encouraging customers to pay using methods that carry low transaction fees, in particular PIN-based debit cards. “Steering may be a boon to merchants, but there’s a potential downside for consumers. Banks rarely offer debit-card rewards if customers use a PIN. That’s because banks want to encourage customers to sign, which earns them a higher fee. In some stores, it can be hard to figure out how to sign when payment devices are set to ask for a PIN.”

However, “banks are trying to make signature-debit payments more attractive for customers. In one of the most popular strategies, banks are developing debit-rewards programs that dole out points for signature transactions. PIN-debit users typically don’t receive rewards for purchases.”

***

Pam Mehnert is general manager at Outpost Naturla Foods Cooperative in Milwaukee, Wisconsin (pam@outpostnaturalfoods.coop).