Customer Card Fees: Hidden Bank Fees Siphon Money from Customers and Merchants at the Pump

Transcription

1 Customer Card Fees: Hidden Bank Fees Siphon Money from Customers and Merchants at the Pump National Association of Convenience Stores 1600 Duke Street Alexandria, VA Tel. (703) nacsonline.com

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3 Customer Card Fees: Hidden Bank Fees Siphon Money from Customers and Merchants at the Pump Published April 2012 National Association of Convenience Stores 1600 Duke Street Alexandria, VA Tel. (703) nacsonline.com Copyright 2012, by NACS All rights reserved. No part of this publication may be reproduced or used in any form or by any means graphic, mechanical or electronic, including photocopying, taping, recording or information storage and retrieval systems, without the prior, written permission of the publisher.

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5 5 Contents Hidden Bank Fees Siphon Money from Customers and Merchants at the Pump... 7 The Convenience Store Industry Background on Swipe Fees... 9 Card Fees and Gas Prices Banks make a windfall on increasing gas prices. 10 Swipe fees increase the price of every gallon of gas sold Swipe fees are increasing faster than the price of gas Conclusion About NACS... 16

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7 nacsonline.com Customer Card Fees Report 7 Hidden Bank Fees Siphon Money from Customers and Merchants at the Pump Gas prices are readily apparent. Drivers see them on big signs when they drive down the street. What they don t see are hidden swipe fees that banks charge merchants to process credit and debit card transactions. But those swipe fees are a very real part of the price of gas. Given current prices, swipe fees may well cost the average driver more than $30 extra this year. Higher gas prices create an additional burden for consumers already wrestling with a weak economy, a sickly housing market and high unemployment. In fact, if you bought anything from a convenience store, including gas, you paid part of the $11.1 billion in credit-card fees the industry paid banks in That s too much and inflated the cost of every single good in the store. Customers don t even know about or ever see these swipe fees, yet they pay for them in the form of higher prices for everything, not just gas, even if they pay cash. In fact, for everything the average family buys in the course of a year, it pays another $400 or so in these hidden, uncompetitive windfalls for the banks. Take a closer look at the numbers: At $3.79 a gallon, the average price of gasoline at the beginning of March, these card fees accounted for about 6.6 cents of the price of each gallon of gas even if you didn t use a card. By the beginning of April, prices rose to $3.94 and card fees are about 7 cents on every single gallon sold in the United States. Just looking at credit card transactions, the swipe fees can easily run to 9 or 10 cents per gallon. For an industry in which over 70% of consumers surveyed say they would drive an extra five minutes out of their way to save 5 cents per gallon, these swipe fees are a very real problem and cannot be avoided. This report demonstrates the remarkable rise in swipe fees, which have grown twice as fast as gas prices in the last decade. Higher gas prices, of course, hurt almost everyone. They impose another hardship on American families facing a tough job market and watching the value of their homes drop. They cripple small businesses, which then hire fewer people. Yet since the fees are hidden from consumers and centrally fixed by Visa and Master- Card, there is little that merchants can do.

8 8 Customer Card Fees Report nacsonline.com The Convenience Store Industry The U.S. convenience store industry, with more than 148,000 stores, posted $681 billion in sales in 2011, of which $486 billion was motor fuel. Convenience stores sell over 80% of the motor fuels purchased in the United States. While 49 of the top 50 convenience-store chains in the United States are members of the National Association of Convenience Stores, the author of this report, the majority are small, independent operators. More than 70 percent of the trade association s membership are companies that operate 10 stores or less. This roughly tracks the industry as a whole. Of the 148,000 convenience stores in the United States, 63 percent are owned and operated by someone who only has one store. These small businesses inhabit a highly competitive industry with razor-thin profit margins. For convenience stores, these bank fees are their second-highest cost after labor, higher than rent, utilities and healthcare costs. In 2011, the industry paid $11.1 billion in card fees, a 23% jump from Card fees exceeded industry profits for the sixth straight year and were 87% higher than store profits. These fees are a major concern for the industry.

9 nacsonline.com Customer Card Fees Report 9 Background on Swipe Fees Every time a consumer uses a debit or credit card, the bank that issued the card charges the retailer a swipe fee (also known as an interchange fee). In addition to swipe fees, the retailer s own bank or the company the retailer uses to process card transactions charges its own processing fee. On top of that, card networks (for example, Visa and MasterCard) charge a network fee. Finally, banks push onto retailers a significant amount of the cost of losses from fraudulent payments, even when the retailer is not at fault. Swipe fees, by far the largest part of the cost of accepting credit cards, are centrally set by the card networks and paid by the retailer to the bank that issued the card used in a transaction. Visa and MasterCard set interchange rates for debit and credit cards, and every member bank within each of their networks adheres to the networks centrally set rates. For debit cards, federal law now limits the ability of card networks to centrally fix rates for debit cards issued by banks with over $10 billion in assets (though banks that set their own fees, without relying on centrally fixed rates, are not limited, nor are banks with less than $10 billion in assets). For credit cards, however, Visa and Master- Card continue to centrally fix swipe fees for their banks. Since the 1990s, swipe fees have been growing out of control. Retailers have no ability to comparison shop because all the banks within a card network (Visa or MasterCard) charge the same fees. And the networks are so big they won t negotiate lower rates. It is take-it-or-leave-it. For merchants to accept any Visa cards or any MasterCard cards, which most merchants in most markets must, they are stuck paying the swipe fees set by the networks. The networks have no incentive to decrease swipe fee rates; the networks compete to make their fees higher, not lower. In fact, it s one way Visa and MasterCard get banks to issue their brand of card. Swipe fees provide billions of dollars each year to issuing banks. Another factor that allows these fees to increase steadily is that they are hidden from consumers and, to some extent, even merchants. For years, the card networks operating rules (also a take-it-or-leave-it system) stopped merchants from providing discounts or otherwise showing consumers the size of the fees everyone was paying. So most consumers have no idea of the additional cost built into virtually everything they buy. In fact, merchants do not know the cost of accepting a particular card at the time of the transaction. Visa and

10 10 Customer Card Fees Report nacsonline.com MasterCard have hundreds of different swipe fee rates associated with different cards. Generally, high-end rewards credit cards carry higher rates than non-rewards cards or debit cards, but there are no electronic or physical markings on the cards to indicate the swipe fee rate. The merchant receives a statement of the fees at the end of the month, but even then it is difficult to pinpoint which kind of card was used and why a certain amount was charged. Federal law and a settlement between the Department of Justice and Visa and MasterCard have opened up the possibility for merchants to discount prices for using cheaper cards and forms of payment, but this ability is limited because American Express is fighting in court to be able to prohibit consumer discounts. Card Fees and Gas Prices Banks make a windfall on increasing gas prices Swipe fees for the gasoline retail industry, like many other industries, are set as a flat fee plus a fee that varies with the cost of the transaction. As gas prices increase, banks automatically receive more revenue from each transaction. When fuel prices go up, banks receive a windfall without providing any additional services or value to merchants or customers. The graph on page 11 below shows the relationship between the card fees paid by the convenience store industry and gasoline prices since The linear relationship between the two figures shows a 99% correlation between gas price increases (or decreases) and card fee increases (or decreases).

11 nacsonline.com Customer Card Fees Report 11 Industry Card Fees vs. Fuel Prices, by Year Swipe fees increase the price of every gallon of gas sold Because of the highly competitive and low-margin dynamics of convenience stores and gas stations, card costs are eventually passed on to consumers in the form of higher prices. In fact, according to a report by the U.S. Energy Information Administration at the Department of Energy, 100% of fuel cost changes in the gasoline retail industry are passed through to the customer. 1 In short, it found that savings as well as cost increases are ultimately reflected in consumer prices. With card industry rules still requiring that swipe fees be hidden in the prices of all goods sold, the fees make the price of gasoline higher for all customers, regardless of how they pay. In other words, if a customer pays with cash, he is still paying for swipe fees. The magnitude of swipe fees built into the price of gasoline is significant. According to industry numbers, based on average fees and adjusted for card market 1 Michael Burdette and John Zyren, Energy Information Administration, Department of Energy, Gasoline Price Pass-through (Jan. 2003), available at

12 12 Customer Card Fees Report nacsonline.com prices became $4 per gallon, those costs would be about 7 cents; at $4.50 per gallon, card costs would be about 7.6 cents). Price differentials of 6 to 8 cents on gasoline are important to consumers. According to a survey earlier this year conducted by NACS, consumers will considerably change their behavior to save even a few cents per gallon on gasoline. 2 To save just one cent, 14% of consumers said they would drive five minutes out of their way. To save 5 cents, 71% of consumers would drive the extra five minutes and 45% would drive an extra ten minutes. FUEL PRICE ESTIMATED CARD COSTS $3.00 $0.057 $3.10 $0.058 $3.20 $0.060 $3.30 $0.061 $3.40 $0.062 $3.50 $0.063 $3.60 $0.065 $3.70 $0.066 $3.80 $0.067 $3.90 $0.069 $4.00 $0.070 $4.10 $0.071 $4.20 $0.073 $4.30 $0.074 $4.40 $0.075 $4.50 $ Michael Burdette and John Zyren, Energy Information Administration, Department of Energy, Gasoline Price Pass-through (Jan. 2003), available at

13 nacsonline.com Customer Card Fees Report 13 What would you do to save? Even at a savings of only a penny per gallon, nearly a quarter of all consumers (23%) would change their behavior. What would you do to save one cent per gallon? 2012 Take a left-hand turn across a busy street 23% Pay by cash inside the store* 16% Drive 5 minutes our of my way 14% Drive 10 minutes out of my way 7% * Only asked of those who pay with debit or credit

14 14 Customer Card Fees Report nacsonline.com To save 3 cents per gallon, nearly one out of four consumers (23%) would drive 10 minutes out of their way. Would this actually save them money? Assuming that the car gets a robust 30 miles per gallon at 45 miles per hour, this 20-minute roundtrip to save approximately 50 cents (a typical fill-up is about 10 gallons) would consume a half-gallon of gasoline, or $1.75 when a gallon cost $3.50. What would you do to save three cents per gallon? 2012 Take a left-hand turn across a busy street 52% Pay by cash inside the store* 31% Drive 5 minutes our of my way 40% Drive 10 minutes out of my way 23% * Only asked of those who pay with debit or credit For a 5-cent savings, more than seven out of 10 consumers would drive five minutes out of their way or take a lefthand turn across a busy street. What would you do to save five cents per gallon? 2012 Take a left-hand turn across a busy street 79% Pay by cash inside the store* 57% Drive 5 minutes our of my way 71% Drive 10 minutes out of my way 47% * Only asked of those who pay with debit or credit

15 nacsonline.com Customer Card Fees Report 15 Swipe fees are increasing faster than the price of gas Since 2004, the growth rate of card fees has dramatically outpaced the rise of the retail price of fuel. As the figure below shows, retail gas prices increased by about 80% between 2004 and 2011, while card fees increased by about 180%. That means that, even if fuel prices leveled off, card costs would still increase and add that much more to the price of gasoline. Even worse, if fuel prices continue to rise, card costs will become an even bigger contributor to the price for consumers. That means consumers are getting squeezed more than they know by the credit card industry every time they fill up and merchants have no way to deal with the pain this inflicts on them. Growth Rate of Card Fees vs. Retail Price of Fuel

16 16 Customer Card Fees Report nacsonline.com Conclusion Hidden swipe fees are out of control and have been for years. Retailers are powerless to do anything as Visa and MasterCard each centrally fix fees for their banks. The resulting take-it-or-leave-it choice doesn t allow comparison-shopping or negotiation and means there is no competitive market pressure to reduce fees. That s not just unfair and anti-competitive. That s a hardship for small merchants struggling to survive in a highly competitive industry and for consumers faced with tough economic times. Retail is a major component of the U.S. economy, and these fees are a large drag on merchants, especially small businesses. High card fees (on gasoline and other products) curtail economic growth, pose a hardship on businesses and consumers and dent the economy just as it is showing signs of reviving. Consumers tell us even a few cents on the price of a gallon of gas makes a big difference to them. Meanwhile, those few pennies add up to a giant windfall for the banks. About NACS The National Association of Convenience Stores (NACS) is an international trade association representing more than 2,100 retail and 1,600 supplier company members. NACS member companies do business in nearly 50 countries worldwide, with the majority of members based in the United States.

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