Customer Card Fees:Hidden Bank Fees Siphon Money from Customersand Merchants at the Pump National Association of Convenience Stores 1600 Duke Street | Alexandria, VA 22314 Tel. (703) 684-3600 | nacsonline.com
nacsonline.com Customer Card Fees Report 7Hidden Bank Fees Siphon Moneyfrom Customers and Merchants atthe PumpGas prices are readily apparent. Drivers see Take a closer look at the numbers: At $3.79them on big signs when they drive down a gallon, the average price of gasoline atthe street. What they don’t see are hidden the beginning of March, these card fees ac-“swipe” fees that banks charge merchants counted for about 6.6 cents of the price ofto process credit and debit card transac- each gallon of gas – even if you didn’t use ations. But those swipe fees are a very real card. By the beginning of April, prices rosepart of the price of gas. to $3.94 and card fees are about 7 cents on every single gallon sold in the United States.Given current prices, swipe fees may wellcost the average driver more than $30 extra Just looking at credit card transactions, thethis year. Higher gas prices create an addi- swipe fees can easily run to 9 or 10 centstional burden for consumers already wres- per gallon. For an industry in which overtling with a weak economy, a sickly housing 70% of consumers surveyed say they wouldmarket and high unemployment. drive an extra five minutes out of their way to save 5 cents per gallon, these swipeIn fact, if you bought anything from a fees are a very real problem and cannot beconvenience store, including gas, you paid avoided.part of the $11.1 billion in credit-card feesthe industry paid banks in 2011. That’s too This report demonstrates the remarkablemuch and inflated the cost of every single rise in swipe fees, which have grown twicegood in the store. as fast as gas prices in the last decade. Higher gas prices, of course, hurt almostCustomers don’t even know about or ever everyone. They impose another hardship onsee these swipe fees, yet they pay for them American families facing a tough job marketin the form of higher prices for everything, and watching the value of their homes drop.not just gas, even if they pay cash. In fact, They cripple small businesses, which thenfor everything the average family buys in the hire fewer people.course of a year, it pays another $400 or soin these hidden, uncompetitive windfalls for Yet since the fees are hidden from consum-the banks. ers and centrally fixed by Visa and Master- Card, there is little that merchants can do.
8 Customer Card Fees Report nacsonline.com The Convenience Store Industry The U.S. convenience store industry, with These small businesses inhabit a highly more than 148,000 stores, posted $681 competitive industry with razor-thin profit billion in sales in 2011, of which $486 margins. For convenience stores, these bank billion was motor fuel. Convenience stores fees are their second-highest cost after sell over 80% of the motor fuels purchased labor, higher than rent, utilities and health- in the United States. care costs. While 49 of the top 50 convenience-store In 2011, the industry paid $11.1 billion in chains in the United States are members card fees, a 23% jump from 2010. Card of the National Association of Convenience fees exceeded industry profits for the sixth Stores, the author of this report, the major- straight year and were 87% higher than ity are small, independent operators. More store profits. These fees are a major con- than 70 percent of the trade association’s cern for the industry. 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.
nacsonline.com Customer Card Fees Report 9Background on Swipe FeesEvery time a consumer uses a debit or Since the 1990s, swipe fees have beencredit card, the bank that issued the card growing out of control. Retailers have nocharges the retailer a swipe fee (also known ability to comparison shop because all theas an interchange fee). In addition to swipe banks within a card network (Visa or Mas-fees, the retailer’s own bank or the company terCard) charge the same fees. And the net-the retailer uses to process card transac- works are so big they won’t negotiate lowertions charges its own processing fee. On top rates. It is take-it-or-leave-it. For merchantsof that, card networks (for example, Visa to accept any Visa cards or any MasterCardand MasterCard) charge a network fee. cards, which most merchants in most mar-Finally, banks push onto retailers a sig- kets must, they are stuck paying the swipenificant amount of the cost of losses from fees set by the networks.fraudulent payments, even when the retailer The networks have no incentive to decreaseis not at fault. swipe fee rates; the networks “compete” toSwipe fees, by far the largest part of the make their fees higher, not lower. In fact, it’scost of accepting credit cards, are centrally one way Visa and MasterCard get banks toset by the card networks and paid by the re- issue their brand of card. Swipe fees pro-tailer to the bank that issued the card used vide billions of dollars each year to issuingin a transaction. Visa and MasterCard set banks.interchange rates for debit and credit cards, Another factor that allows these fees toand every member bank within each of their increase steadily is that they are hiddennetworks adheres to the networks’ centrally from consumers and, to some extent, evenset rates. merchants.For debit cards, federal law now limits the For years, the card networks’ operatingability of card networks to centrally fix rates rules (also a take-it-or-leave-it system)for debit cards issued by banks with over stopped merchants from providing dis-$10 billion in assets (though banks that set counts or otherwise showing consumers thetheir own fees, without relying on centrally size of the fees everyone was paying.fixed rates, are not limited, nor are bankswith less than $10 billion in assets). So most consumers have no idea of the additional cost built into virtually everythingFor credit cards, however, Visa and Master- they buy. In fact, merchants do not know theCard continue to centrally fix swipe fees for cost of accepting a particular card at thetheir banks. time of the transaction. Visa and
10 Customer Card Fees Report nacsonline.com MasterCard have hundreds of different pinpoint which kind of card was used and swipe fee rates associated with different why a certain amount was charged. cards. Federal law and a settlement between the Generally, high-end rewards credit cards Department of Justice and Visa and Mas- carry higher rates than non-rewards cards terCard have opened up the possibility for or debit cards, but there are no electronic merchants to discount prices for using or physical markings on the cards to in- cheaper cards and forms of payment, but dicate the swipe fee rate. The merchant this ability is limited because American receives a statement of the fees at the end Express is fighting in court to be able to of the month, but even then it is difficult to prohibit consumer discounts. Card Fees and Gas Prices Banks make a windfall on When fuel prices go up, banks receive a increasing gas prices windfall without providing any additional services or value to merchants or custom- Swipe fees for the gasoline retail industry, ers. The graph on page 11 below shows the like many other industries, are set as a flat relationship between the card fees paid by fee plus a fee that varies with the cost of the convenience store industry and gaso- the transaction. As gas prices increase, line prices since 2003. The linear relation- banks automatically receive more revenue ship between the two figures shows a 99% from each transaction. correlation between gas price increases (or decreases) and card fee increases (or decreases).
nacsonline.com Customer Card Fees Report 11 Industry Card Fees vs. Fuel Prices, by YearSwipe fees increase the price of as cost increases are ultimately reflected inevery gallon of gas sold consumer prices.Because of the highly competitive and With card industry rules still requiring thatlow-margin dynamics of convenience stores swipe fees be hidden in the prices of alland gas stations, card costs are eventu- goods sold, the fees make the price of gas-ally passed on to consumers in the form of oline higher for all customers, regardless ofhigher prices. In fact, according to a report how they pay. In other words, if a customerby the U.S. Energy Information Administra- pays with cash, he is still paying for swipetion at the Department of Energy, 100% fees. The magnitude of swipe fees built intoof fuel cost changes in the gasoline retail the price of gasoline is significant.industry are passed through to the custom- According to industry numbers, based oner. In short, it found that savings as well 1 average fees and adjusted for card market1 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.
12 Customer Card Fees Report nacsonline.com prices became $4 per gallon, those costs their behavior to save even a few cents per would be about 7 cents; at $4.50 per gal- gallon on gasoline.2 To save just one cent, lon, card costs would be about 7.6 cents). 14% of consumers said they would drive five minutes out of their way. To save 5 Price differentials of 6 to 8 cents on gaso- cents, 71% of consumers would drive the line are important to consumers. According extra five minutes and 45% would drive an to a survey earlier this year conducted by extra ten minutes. NACS, consumers will considerably change FUEL ESTIMATED PRICE 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 $0.076 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.
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 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 left- hand 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
nacsonline.com Customer Card Fees Report 15Swipe fees are increasing faster much more to the price of gasoline.than the price of gas Even worse, if fuel prices continue to rise,Since 2004, the growth rate of card fees card costs will become an even biggerhas dramatically outpaced the rise of the contributor to the price for consumers. Thatretail price of fuel. As the figure below means consumers are getting squeezedshows, retail gas prices increased by about more than they know by the credit card80% between 2004 and 2011, while card industry every time they fill up – andfees increased by about 180%. That means merchants have no way to deal with thethat, even if fuel prices leveled off, card pain this inflicts on them.costs would still increase and add that Growth Rate of Card Fees vs. Retail Price of Fuel
16 Customer Card Fees Report nacsonline.com Conclusion Hidden swipe fees are out of control and component of the U.S. economy, and have been for years. Retailers are powerless these fees are a large drag on merchants, to do anything as Visa and MasterCard especially small businesses. each centrally fix fees for their banks. The High card fees (on gasoline and other resulting take-it-or-leave-it choice doesn’t products) curtail economic growth, pose a allow comparison-shopping or negotiation hardship on businesses and consumers and and means there is no competitive market dent the economy just as it is showing signs pressure to reduce fees. of reviving. Consumers tell us even a few That’s not just unfair and anti-competitive. cents on the price of a gallon of gas makes That’s a hardship for small merchants a big difference to them. Meanwhile, those struggling to survive in a highly competitive few pennies add up to a giant windfall for industry and for consumers faced with the banks. tough economic times. Retail is a major 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.