Credit card companies make more at the pump than the retailers selling fuel – and the situation is getting worse.
While convenience stores seek to rein in most of their expenses, a significant expense continued to grow: credit and debit card fees. In 2007, these fees more than doubled the convenience and petroleum retailing industry’s pretax profits, and are expected to grow even more in the coming years. The fees retailers paid in 2007 were more than double the $3.2 billion in fees paid as recently as in 2003.
More than 80 percent of a retailer’s credit card fees are related to interchange fees. Credit card interchange fees are a percentage of each transaction that Visa and MasterCard and their member banks collect from retailers every time a credit or debit card is used. In the U.S., these fees average 1.75 percent across all channels (and are often higher for pay-at-the-pump transactions), approximately three times the rate in Europe and four times the rate in Australia. When gas prices topped $4.00 per gallon in July 2008, total credit card fees were approximately 10 cents – or more – per gallon.
The reason for the huge increase in credit card fees is three-fold:
- As average annual gas prices increased, interchange fees, which are largely percentage based, increased as the price of gas increased.
- As the price of gas increased, more people paid for their gas by plastic. In 2008, between 60 and 70 percent of gas customers paid for their gas by plastic, and there was a huge upswing in card usage as gas prices topped $4.00 per gallon. However, card usage at the pump has not decreased as prices dropped over the last two months of 2008, and retailers continue to see high card usage and fees.
- Credit card companies try to get consumers to swap their existing cards for so-called “higher rewards” cards that cost the retailer even higher interchange fees. This is why consumers already owning several credit cards receive a stunning volume of junk mail from the credit card companies. Only 13 percent of the credit card interchange fee actually goes to pay the real cost of the transaction; the rest goes to paying for unrelated expenses like credit card junk mailings.
Feeling heat from consumers groups and Congress, Visa announced on June 26, 2008, that it had “fixed” the problem of outrageous interchange fees by reducing the percentage that retailers pay at the pump. There are dozens of interchange rates, and these rates vary by card used, retail channel and processing method. But for a point of reference, Visa adjusted one typical rate accessed on fuel transactions (CPS/Automated Fuel Dispenser using a Visa Signature card) from 1.65 percent plus 10 cents per transaction to 1.15 percent plus 25 cents per transaction. However, this move was more about trying to distract Congress from the issue at hand, as retailers reported that they would have to sell more than $100 of gas per transaction – a 25-plus gallon fill-up at the time – to see a drop in fees. Second, as prices plummeted the second half of the year, retailers found that Visa’s “fix” actually increased fees compared to the previous rate structure.
Visa’s adjustment in its fee structure clearly demonstrated that there are problems with the U.S. interchange fee system. Unfortunately, this move failed to address the biggest problem: Visa, MasterCard and their member banks essentially set prices in a system devoid of competition, without any input from retailers.
There is a considerable difference between the fees charged for a PIN-based debit transaction and a credit transaction. Convenience stores, which generate approximately two-thirds of their sales volume from motor fuels, tend to be charged a higher rate than other retail channels because they are not as easily able as other retailers to steer pay-at-the-pump customers to choose debit and enter a PIN. 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 good news is that solutions – regulatory and otherwise – are being explored to reduce these outrageous credit card fees before they become even more burdensome.
In April 2003, Wal-Mart 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 that these actions caused merchants to pay excessive fees for credit and debit transactions. As a result, the 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.
On April 24, 2006, an amended consolidated complaint against Visa, MasterCard and several major banks was filed by a broad range of merchant groups, including NACS, in the Eastern District of New York. This consolidated complaint updates an earlier complaint filed in September 2005 by NACS and other groups that alleged that Visa, MasterCard and the banks engage in collusive practices to fix credit card interchange fees. The complaint updates the earlier complaint to include debit cards, and additional merchant associations joined as plaintiffs.
“We believe that price fixing of interchange is equally as problematic in debit cards as it is in credit cards,” said NACS President and CEO Hank Armour. “Because debit cards are commonly used at convenience stores, especially at the gas pump, this is a significant amendment to the complaint,” said Armour. The case could go to trial in 2009.
On June 16, the U.S. House Judiciary Committee passed the Credit Card Fair Fee Act of 2008 (H.R. 5546) with bipartisan support. The bill would allow merchants for the first time to be included in the negotiating process with Visa and MasterCard, separately with their banks, to come up with a voluntary agreement on interchange rates and terms. This issue is expected to be picked up by Congress in 2009.
“The days when Visa and MasterCard are able to impose exorbitant fees on consumers are numbered. Now that Congress and the public are learning how credit card fees are driving up the price of gas, food and other necessities, the big credit card companies are in for a very rough ride,” noted NACS 2007-2008 Chairman Richard Oneslager following the vote.
There are a number of additional rules that Visa, MasterCard and their member banks impose upon retailers, who are faced with a “take-it-or-leave-it” proposition and no input into their contracts.
This rule treats a retailer company as a single entity and results in the acceptance of Visa and MasterCard being presented as an all-or-nothing proposition. Only Visa has this rule in place, but the practical effect is that it applies to both brands of cards. The rule provides that if a retailer wants to accept these cards at one of its locations, then it must accept them at all locations. The rule severely constrains the ability of retailers to test whether their businesses could survive without accepting Visa and it completely prohibits merchants from making business judgments about whether to accept cards on a location by location basis.
The honor all cards rule provides that a retailer must accept all Visa (or MasterCard) cards for that merchant to be able to accept any such cards. Following antitrust litigation that settled in 2003, this rule was limited so that a retailer can take debit cards without taking credit cards (or vice-versa). In spite of the fact that Visa and MasterCard argued at the time that this rule (covering both debit and credit cards) was of fundamental importance to the existence of their systems, they have clearly flourished since it was scaled back. But the rule persists, requiring all Visa (or MasterCard) credit cards to be accepted (or all debit cards to be accepted) in order for a merchant to participate in the system at all. This is true regardless of the size of the interchange fee associated with a particular card.
The non-discrimination rule complements and is closely intertwined with the honor all cards rule. It provides that merchants may not discriminate by favoring one type of Visa (or MasterCard) card over another one. This prohibits merchants expressing a preference for a particular card (such as one with a lower interchange fee) or providing differing levels of customer discounts for particular cards based upon the interchange fees associated with particular cards.
The no surcharge rule prohibits retailers from charging a higher price for a card transaction than for a cash transaction except that the Truth in Lending Act does not allow Visa and MasterCard to prevent this practice if it amounts to a discount for cash rather than a surcharge. Of course, it is very difficult to distinguish between a cash discount and a surcharge and it is even more difficult to articulate any rational policy basis for a distinction between the two. In fact, the cards associations have used the no-surcharge rule as a tool in order to try to prevent merchants from offering cash discounts.
This rule applies primarily (if not exclusively) to gasoline and diesel fuel transactions. The rule sets an arbitrary dollar limit of $75 for card transactions at the pump. Until April 2008, however, Visa’s limit was $50. If a fuel purchase exceeds these limits, then the merchant is deemed to have broken the rule and the issuing bank has the right to deny payment of the transaction amount to the merchant. For MasterCard transactions, the amount denied is typically the amount over $75. For Visa transactions, the entire transaction amount was denied in the past, though Visa has recently changed this practice so that it only denies the amount over $75. It appears (though is not clear) that in many cases funds have not been paid to the merchant even if the consumer has paid the issuing bank for the transaction.
Visa and MasterCard prohibit retailers from establishing either a minimum or a maximum transaction amount for card transactions. Interchange fees can be exorbitant for small transactions because part of the fee is typically a fixed amount (anywhere from 5 to 25 cents) in addition to a percentage of the overall transaction amount. The fixed portion of the fee can turn many small dollar purchases into money losers for merchants. On the other hand, large purchases can result in huge interchange fees because part of the fees are based on a percentage of the overall transaction. This constraint is also particularly difficult to square with the punitive measures that can result due to reason code 96 if a fuel transaction exceeds $50 or $75.
Visa and MasterCard require that their transactions be routed on their own networks for the purpose of processing. There are, however, lower cost ways to route these transactions, which would take unnecessary cost out of the system and make the Visa and MasterCard networks compete on price.
Perhaps most frustrating to retailers is how the credit card companies use confusion to try to maintain the status quo, a system where they write all the rules. Witness their conflicting messages on whether they will make the operating rules to which retailers are forced to abide but cannot see, finally available.
Feb. 15, 2006: Visa and MasterCard falsely claim their operating rules are available online:
“That contract is fully disclosed, the price is fully disclosed. If they want to see Visa’s terms and MasterCard’s terms, they, in fact, put them on their website.”
– The Honorable Timothy Muris, Of Counsel, The Electronic Payments Coalition
July 13, 2006: Visa contradicts its February testimony and now promises to make the rules available:
“As Visa continues to grow and expand in today's dynamic and competitive marketplace, we are committed to making the organization as transparent as reasonably possible. We are now taking transparency one step further by providing the Visa USA Operating Regulations to important stakeholders in the Visa system.”
– Visa Corporate Press Release
July 19, 2006: Visa again delays revealing its operating rules:
“Beginning in September, merchants that want to see the rules will be able to get a copy. We are proud of our network, and happy to include merchants among those who have access to our operating regulations.”
– Joshua Floum, General Counsel, Visa, U.S.A., United States Senate Committee on the Judiciary testimony
July 19, 2006: MasterCard falsely claims its operating rules are available online:
“First of all, all of the MasterCard rules that apply to the merchant side of the business are available in their entirety online, on our website, mastercardmerchant.com, including our discounting for cash rule, which says nothing about posting two separate prices.”
– Joshua L. Peirez, Associate General Counsel, MasterCard Worldwide, United States Senate Committee on the Judiciary testimony
May 8, 2008: As a congressional hearing looms, Visa contradicts itself yet again, and promises that its rules will be available:
“Visa Inc. announced today that it will for the first time make its Visa International and Regional Operating Regulations available publicly, effective May 15, 2008. On May 15, Visa’s rules will be publicly available to interested parties, including all Visa rules related to merchants’ participation in the system.”
– Visa Corporate Press Release
May 15, 2008: Right before a House Judiciary hearing, MasterCard contradicts its earlier statements and again promises to make full set of rules available:
“I would like to take this opportunity to inform the Task Force that MasterCard will make its entire set of operating rules available to the public in the near future. This will give merchants and anyone else who is interested the ability to review all of MasterCard’s rules.”
– Joshua L. Peirez, Associate General Counsel, MasterCard Worldwide
As credit card companies increasingly push credit and debit card usage for customers, convenience stores also face the challenge of greater fees inside the store. Facing higher per-transaction fees when consumers use plastic, convenience stores especially feel this pain on low-ticket items. For especially low-priced items, such as 25-cent candy, it actually would cost the retailer more money to process a transaction on plastic than if the item were stolen.
In 2007, interchange fees totaled more than $42 billion in the United States. That is why retailers in a number of other channels have joined with convenience stores to fight outrageous interchange fees. They have formed the Merchants Payments Coalition to fight for a more competitive and transparent credit card fee system that better serves American consumers and retailers alike. More information can be found at www.unfaircreditcardfees.com.