As convenience stores seek to rein in most of their expenses, a significant expense continues to grow: credit and debit card interchange "swipe" fees.
After a 21.6% increase in convenience store industry card fees in 2010, they jumped 23.3% in 2011 to a record $11 billion and hit $11.2 billion in 2012. Total credit and debit card fees surpassed overall c-store industry profits for the sixth consecutive year. As a percentage of overall sales, credit and debit card fees increased from 1.56% in 2010 to 1.62% in 2011 of total industry sales dollars, and were more than 58% higher than total industry pretax profits in 2011. Credit card costs in cents per gallon amounted to nearly 7 cents in 2011 at U.S. convenience stores. 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 72% of all motor fuels purchases are paid with plastic, but that figure can climb to as much as 90% 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, retailers pay more in fees when prices are higher, even though they are selling the same amount of product. The credit card companies are one of the few beneficiaries of higher gas prices.
Credit card fees cost a typical convenience store 2% 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 œswipe 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 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, online 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.
In 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.
The MPC aggressively supported the Durbin Amendment, signed into law by President Obama in 2010 as part of the Dodd-Frank Wall Street Reform Act, which directed the Federal Reserve to set rates for debit card swipe fees that are "reasonable and proportional" to the transaction. The Federal Reserve — despite releasing draft debit rules on December 16, 2010, that limited debit card swipe fees to between 7 and 12 cents per transaction — released a final rule on June 29, 2011, that set the fees at 21 cents per transaction, plus 0.05% of the transaction's value, and an additional one cent per transaction to pay for card security compliance to card brand standars. While still projected to save close to $500 million in annual cost reductions, the Fed's rule was a far cry from the $1.3 billion anticipated from the original recommendation. Read more in NACS Magazine about the NACS suit against the Federal Reserve alleging it failed to implement the law as required in issuing its final debit card swipe fee rules.
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 in on April 24, 2006. The consolidated complaint updates an earlier complaint filed on September 26, 2005, by NACS and other groups to include debit cards, as well as additional merchant associations who joined as plaintiffs. On July 13, 2012, NACS promptly rejected the proposed settlement — the largest antitrust settlement in U.S. history at $7.25 billion — that amounts to less than two months' worth of swipe fees, based on the estimated $50 billion in swipe fees collected by the credit card companies on an annual basis. Worse, there are no fundamental market changes that would constrain Visa and MasterCard from continuing to raise rates to a point where the net effect is to make merchants pay for their own settlement €" and then some.
NACS rejecting the proposed settlement led to other named plaintiffs representing the class of all merchants announcing that they too opposed. Other merchants and trade associations that were not named plaintiffs also did the same. Merchant opposition continued to build over the next two months as all six association plaintiffs rejected the proposal. Then, on October 11, 2012, a 10th named plaintiff formerly announced its opposition to the proposal, provding an official majority of the named plaintiffs. The next step was for Judge Gleeson of the U.S. District Court for the Eastern District of New York to decide whether or not to give preliminary approval to the proposed settlement.
On February 1, 2013, the U.S. Court of Appeals for the Second Court ruled that an appeal of the proposed swipe fee settlement that was announced in July 2012 should wait until after objections to the settlement are filed and heard in September 2013. The proposed settlement also allowed retailers to begin surcharging for credit purchases as of January 27, 2013. Also, settlement notices are being distributed to merchants across the country. NACS is both opting out and objecting to the settlement. Retailers who accepted Visa and/or MasterCard at any time between January 1, 2004, and November 27, 2012, will need to decide whether to opt out, object to, or accept the settlement.