As convenience stores seek to rein in most of their expenses, a significant expense continues to grow: credit/debit card fees. In 2010, these fees again surpassed industry pretax profits.
The total cost of credit/debit fees to convenience stores in 2010 was $9.0 billion, nearly triple the $3.2 billion in fees a recent as in 2003. The total cost of credit card fees in 2010 exceeded convenience store industry profits ($6.5 billion), meaning the credit card industry took in more at the stores than the store owners themselves for the fifth straight year.
Credit card fees are the second-largest expense at the store level. Only labor costs are more.
Particularly elevated motor fuels prices, retailers are seeing the impact of credit card transaction fees. The overall increase in average annual gas prices led to a significant increase in the use of credit cards at the pump. NACS estimates that 60 percent to 70 percent of all motor fuels purchases are now paid with plastic, but that figure can climb to as much as 90 percent of all transactions when prices are climbing. Compounding this problem, retailers pay more in credit/debit fees when prices are elevated. Because debit/credit fees are largely percentage based, retailer pay more in fees when prices are higher, even though they are selling the same amount of product. The debit/credit card companies are one of the few beneficiaries of higher gas prices.
The rise in credit card fees has prompted an increasing number of retailers to consider cash discounts at the pump.
Retailers also are hit with additional costs because of chargebacks, known as “Reason Code 96. They can be denied payment by the banks if they authorize a pay-at-the-pump transaction for more than $75, even though the customer does not challenge the transaction. As long as fuel prices remain high, “Reason Code 96” will substantially increase the cost of credit card acceptance.
Credit card fees cost a typical convenience store 2 percent of the transaction, which is made up of several components, some of which can be costlier for convenience stores than other channels.
The largest component of credit card fees — known as interchange or “swipe fees” — accounts for almost all of the credit card fees charged to convenience stores. Many convenience stores are charged higher interchange rates set by the card associations whose members are card-issuing banks. Each type of card carries different fees that reflect factors like fraud rates, risk factors, transaction volume and processing path.
American Express and Discover also set interchange rates, but operate as independent entities as opposed to the association approach that governs Visa and MasterCard and their respective member banks.
There is a considerable difference between the fees charged for a PIN-based debit transaction and a credit transaction. Convenience stores, which generate three-quarters of their sales volume from motor fuels, tend to be charged a higher rate than that other retail channels because they are not as easily able to steer pay-at-the-pump customers to choose debit and enter a PIN as other retailers. As a result, many debit purchases, which should carry the lower rates, are processed as credit and carry higher costs to convenience store retailers.
The other component of credit card fees is acquiring fees; credit card companies have increased their acquiring fees, such as authorization, capture and settlement fees, charged to retailers over the past few years — even though the per-unit processing costs have declined.
Another concern for convenience store retailers is that they are often hit twice for fees from the same customer visit – once when the customer pays at the pump, and once when he or she pays inside the store, if that is also a credit/debit card transaction.
NACS Works Towards Solutions
NACS is a founding member of the Merchants Payments Coalition, a group made up of trade associations representing retailers, restaurants, supermarkets, drug stores, convenience stores, gas stations, on-line merchants and other businesses that accept credit and debit cards and are concerned about the increasing interchange fees charged by banks and credit card companies to process credit and debit transactions.
The MPC has aggressively supported the Durbin amendment, passed by Congress and signed into law by President Obama in 2010. It directed the Federal Service to set rates for debit swipe fees that are “reasonable and proportional” to the transaction. Final rules from the Federal Reserve are expected to be released shortly and to take effect as soon as July 21, 2011.
NACS is working with dozens of retailers — representing more than 2,000 stores — regarding their participation in a new money-saving credit card processing program. This program allows retailers to choose between a card processor that charges a percentage of the sale versus one that charges cents per transaction. An advantage of the cents-per transaction approach is that as the dollar value of the transaction grows (such as with the rising price of gasoline), the card processing fees remains the same.
In April 2003, Walmart and thousands of other retailers won a class-action lawsuit against Visa and MasterCard that claimed that the credit-card companies, individually, and in conspiracy with their member banks, violated the federal antitrust laws by forcing merchants who accept Visa and/or MasterCard-branded credit cards for payment also to accept Visa and/or MasterCard-branded debit cards for payment, and by conspiring and attempting to monopolize a market for general-purpose point-of-sale debit cards.
Retailers said these actions caused merchants to pay excessive fees for credit and debit transactions. As a result, card companies settled the case and agreed to pay back damages, temporarily reduce fees and establish clear and distinct visual as well as electronic markers for identifying a credit from a debit card carrying a Visa or MasterCard logo.
A greater use of PIN-based debit cards — which customers prefer for convenience and greater security — could also help reduce fees — as long as retailers are rewarded by the lower interchange for these more-secure transaction methods.