nacs card feesreport_040912

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

National Association of Convenience Stores1600 Duke Street | Alexandria, VA 22314 Tel. (703) 684-3600 | nacsonline.com

Customer Card Fees:

National Association of Convenience Stores1600 Duke Street | Alexandria, VA 22314 Tel. (703) 518-4272 | 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.


Customer Card Fees:

Published April 2012

5

Hidden Bank Fees Siphon Money from Customers and Merchants at the Pump . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

The Convenience Store Industry . . . . . . . . . . . . . . . . . . 8

Background on Swipe Fees . . . . . . . . . . . . . . . . . . . . . 9

Card Fees and Gas Prices . . . . . . . . . . . . . . . . . . . . . 10

Banks make a windfall on increasing gas prices . 10

Swipe fees increase the price of every gallon of gas sold . . . . . . . . . . . . . . . . . . . . . . . 11

Swipe fees are increasing faster than the price of gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

About NACS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

C o n t e n t s

6 Customer Card Fees Report nacsonline .com

nacsonline .com Customer Card Fees Report 7

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 transac-

tions . 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 addi-

tional burden for consumers already wres-

tling 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 2011 . 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 ac-

counted 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 consum-

ers and centrally fixed by Visa and Master-

Card, there is little that merchants can do .



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 major-

ity 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 indus-

try 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 health-

care costs .

In 2011, the industry paid $11 .1 billion in

card fees, a 23% jump from 2010 . Card

fees exceeded industry profits for the sixth

straight year and were 87% higher than

store profits . These fees are a major con-

cern for the industry .

The Convenience Store Industry


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 transac-

tions 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 sig-

nificant 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 re-

tailer 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 Mas-

terCard) charge the same fees . And the net-

works 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 mar-

kets 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 pro-

vide 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 dis-

counts 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


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 in-

dicate 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 Mas-

terCard 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 custom-

ers . The graph on page 11 below shows the

relationship between the card fees paid by

the convenience store industry and gaso-

line prices since 2003 . The linear relation-

ship between the two figures shows a 99%

correlation between gas price increases

(or decreases) and card fee increases (or

decreases) .


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 eventu-

ally passed on to consumers in the form of

higher prices . In fact, according to a report

by the U .S . Energy Information Administra-

tion at the Department of Energy, 100%

of fuel cost changes in the gasoline retail

industry are passed through to the custom-

er .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 gas-

oline 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

Industry Card Fees vs. Fuel Prices, by Year

1 Michael Burdette and John Zyren, Energy Information Administration, Department of Energy, Gasoline Price Pass-through (Jan . 2003), available at http://www .eia .doe .gov/pub/oil_gas/petroleum/feature_articles/2003/gasolinepass/gasolinepass .htm .


prices became $4 per gallon, those costs

would be about 7 cents; at $4 .50 per gal-

lon, card costs would be about 7 .6 cents) .

Price differentials of 6 to 8 cents on gaso-

line 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 .

$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 $0 .076

FUEL PRICE

ESTIMATED CARD COSTS

1 Michael Burdette and John Zyren, Energy Information Administration, Department of Energy, Gasoline Price Pass-through (Jan . 2003), available at http://www .eia .doe .gov/pub/oil_gas/petroleum/feature_articles/2003/gasolinepass/gasolinepass .htm .


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 .

* Only asked of those who pay with debit or credit

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%


For a 5-cent savings, more than seven out of 10 consumers would drive five minutes out of their way or take a left-hand turn across a busy street .


What would you do to save five cents per gallon? 2012





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






Growth Rate of Card Fees vs. Retail Price of Fuel

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 .


Conclusion

About NACS

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 .

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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