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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 22314 Tel. (703) 684-3600 | nacsonline.com

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 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.

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Contents 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

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Customer Card Fees Report

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Hidden Bank Fees Siphon Money from Customers and Merchants at the Pump Gas prices are readily apparent. Drivers see

Take a closer look at the numbers: At $3.79

them on big signs when they drive down

a gallon, the average price of gasoline at

the 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 of

to process credit and debit card transac-

each gallon of gas – even if you didn’t use a

tions. But those swipe fees are a very real

card. By the beginning of April, prices rose

part of the price of gas.

to $3.94 and card fees are about 7 cents on

Given current prices, swipe fees may well

every single gallon sold in the United States.

cost the average driver more than $30 extra

Just looking at credit card transactions, the

this year. Higher gas prices create an addi-

swipe fees can easily run to 9 or 10 cents

tional burden for consumers already wres-

per gallon. For an industry in which over

tling with a weak economy, a sickly housing

70% of consumers surveyed say they would

market and high unemployment.

drive an extra five minutes out of their way

In fact, if you bought anything from a convenience store, including gas, you paid part of the $11.1 billion in credit-card fees

to save 5 cents per gallon, these swipe fees are a very real problem and cannot be avoided.

the industry paid banks in 2011. That’s too

This report demonstrates the remarkable

much and inflated the cost of every single

rise in swipe fees, which have grown twice

good in the store.

as fast as gas prices in the last decade.

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

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.

in these hidden, uncompetitive windfalls for

Yet since the fees are hidden from consum-

the banks.

ers and centrally fixed by Visa and MasterCard, there is little that merchants can do.

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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 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.

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Background on Swipe Fees Every time a consumer uses a debit or

Since the 1990s, swipe fees have been

credit card, the bank that issued the card

growing out of control. Retailers have no

charges the retailer a swipe fee (also known

ability to comparison shop because all the

as 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 lower

tions charges its own processing fee. On top

rates. It is take-it-or-leave-it. For merchants

of that, card networks (for example, Visa

to accept any Visa cards or any MasterCard

and 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 swipe

nificant amount of the cost of losses from

fees set by the networks.

fraudulent payments, even when the retailer is not at fault.

The networks have no incentive to decrease swipe fee rates; the networks “compete” to

Swipe fees, by far the largest part of the

make their fees higher, not lower. In fact, it’s

cost of accepting credit cards, are centrally

one way Visa and MasterCard get banks to

set 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 issuing

in a transaction. Visa and MasterCard set

banks.

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 MasterCard continue to centrally fix swipe fees for their 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

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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 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 2003. The linear relationship between the two figures shows a 99% correlation between gas price increases (or decreases) and card fee increases (or decreases).

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Industry Card Fees vs. Fuel Prices, by Year

Swipe fees increase the price of every gallon of gas sold

consumer prices.

Because of the highly competitive and

With card industry rules still requiring that

low-margin dynamics of convenience stores

swipe fees be hidden in the prices of all

and 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 of

higher prices. In fact, according to a report

how they pay. In other words, if a customer

by the U.S. Energy Information Administra-

pays with cash, he is still paying for swipe

tion at the Department of Energy, 100%

fees. The magnitude of swipe fees built into

of 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 on

er. In short, it found that savings as well

average fees and adjusted for card market

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as cost increases are ultimately reflected in

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.

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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

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

FUEL PRICE

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.

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 $0.076

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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.

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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

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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


52%


31%


40%



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


79%


57%


71%



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Swipe fees are increasing faster than the price of gas

much more to the price of gasoline.

Since 2004, the growth rate of card fees

card costs will become an even bigger

has dramatically outpaced the rise of the

contributor to the price for consumers. That

retail price of fuel. As the figure below

means consumers are getting squeezed

shows, retail gas prices increased by about

more than they know by the credit card

80% between 2004 and 2011, while card

industry every time they fill up – and

fees increased by about 180%. That means

merchants have no way to deal with the

that, even if fuel prices leveled off, card

pain this inflicts on them.

Even worse, if fuel prices continue to rise,

costs would still increase and add that

Growth Rate of Card Fees vs. Retail Price of Fuel

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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 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.

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

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.

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