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Last October, Convenience Store News published a feature article on the impact of rising credit-card interchange fees on c-store retailers. At the time, both MasterCard and Visa pledged to provide greater transparency about their rate structures. This prompted Mallory Duncan, senior vice president and general counsel at the National Retail Federation (NRF), and chairman of the Merchants Payment Coalition (MPC), to call Visa and MasterCard's attempts "an extremely welcome step toward a competitive market." However, retailers were still far from satisfied. Five months later, they remain disgruntled.
Visa and MasterCard disclosed their interchange rates last fall, but according to Merchants Payment Coalition chairman Mallory Duncan, the disclosures represent "a bewildering array of about 80 combinations for Visaand around 150 for MasterCard, with no averages, dollar amounts or indication of which rates were most common. This isn't transparency," said Duncan.
And, rising interchange fees continue to hurt retailers' bottom lines. "In the last five or six years, my interchange fees have risen from approximately $30,000 a year to $158,000," said Tom Schlangen, owner of two c-stores in New Hope, Minn. "These forced fees are driving independent businesses to the brink, while the credit-card companies are realizing record profits."
In 2007, interchange fees are estimated to reach between $30 and $40 billion. Between 1980 and 2005, the amount that American consumers charged to their cards grew from an estimated $69 billion per year to more than $1.8 trillion. It is estimated that every American consumer is unknowingly charged $300 in interchange fees each year. In today's market, for example, when a consumer spends $2.50 on a gallon of gasoline, roughly five cents goes to the credit-card companies.
According to a report by Diamond Management & Technology Consultants, paying for issuer rewards programs consumes about 44 percent of interchange costs. "Merchants likewise pay about 3 percent of their interchange dollars for association branding costs. Meanwhile, processing– the original reason for interchange — comprises only 13 percent of interchange costs," noted Amy Dawson, who co-authored the report with Carl Hugener. "Given the merchants' lack of perceived value for what they pay, the situation is clearly unstable."
Theoretically, interchange is essential to economic growth and stability, for it allows transactions between disparate parties globally. Without it, thousands of agreements between issuing banks and merchant banks would be required in order to achieve the same degree of universal acceptance afforded to merchants and customers alike.
The issue under severe scrutiny is not eliminating interchange fees, but rather uncovering how percentage rates are determined. Visa and MasterCard, which collectively account for roughly 80 percent of all credit-card transactions in the United States, have been the collective focus of organizations like the National Retail Federation (NRF) and NACS (the Association for Convenience and Petroleum Retailing), other retail organizations, independent operators, and politicians — not to mention the litigants of some 40 pending lawsuits, nationally.
Bound and Gagged
"Visa is committed to providing visibility into our operations and will continue to seek opportunities to increase clarity into all parts of our business and strengthen the organization's structure," said Rhonda Bentz, vice president of public affairs for Visa. "For this reason, Visa made its interchange rates available online this past October to provide more clarity around pricing than you see in any retail environment."
Opponents, however, call that step more of a gag order than transparency because the rate information is only available to participating merchants who sign a non-disclosure agreement to not discuss what they read."Visa told me that their operating rules are approximately 1,700 pages or about as thick as a New York City phone book," said NACS senior vice president for government relations, Lyle Beckwith. "To date, I am not aware of any retailer who has received these. There has been no [NACS] member response, because if anyone did accept Visa's offer to view the rules, they can't tell me or talk to anyone about it."
Bentz explained Visa USA's Operating Regulations are a confidential document and govern the participation of Visa's members in the payment network."As such, we don't believe it is unreasonable to ask that merchants who wish to access the Operating Regulations sign a non-disclosure agreement," she said. "Our goal is to provide partners with the information they are interested in, while ensuring we use the highest standard of care to protect the security of the Visa system. As a result, proprietary and competitive information, as well as certain rules relating to the security of the Visa network have been omitted."
She claimed the omitted material accounts for less than one percent of the Operating Regulations.
In response to retailers, Bentz said that Visa's merchant rules guide has been available for over a decade and is "among the most viewed documents on our Web site.Some merchants have asked us to provide more details, so we responded to this request by taking disclosure one step further and sharing Visa's Operating Regulations with merchants and third party agents."
Duncan claims that both Visa and MasterCard have had many opportunities to negotiate, but are only responding now due to political and public pressure. "This is like finding religion once the hearse pulls up," said Duncan.
MasterCard, on the other hand, seemingly scored more points with critics after it announced last September that it would be the first major card company to post its interchange fee schedule online. "Since publishing the rates, merchants have generally welcomed this response to their requests for increased transparency around interchange," said Joshua Pierez, group executive, global public policy and associate general counsel for MasterCard Worldwide.
Pierez explained that MasterCard placed a limit on the fees it charges retailers who accept cards for fuel purchases. The capped fee for gas retailers will provide benefits to merchants on gas purchases of $50 or more, according to MasterCard, which estimated that interchange fees could be reduced by 21 percent on a purchase totaling $60. However, at an average price of $2.23 a gallon (as of February 14), it would require a fill-up of almost 27 gallons to generate a $60 transaction.
"It's important to note that merchants do not pay interchange fees, but rather merchant discount fees and that the merchant discount fees paid by merchants to their acquiring banks are negotiable," said Pierez.
Schlangen of New Hope Fuel and Wash said recent drops in gas prices have offered a slight reprieve. However, gas prices will surely rise again. "At a certain point, it's not a matter of if independent retailers will close their doors; it's a matter of when," said Schlangen.
Earlier this month, MasterCard overhauled its merchant-fee structure, but the new program promises little relief to retailers. The company is establishing a new merchant-pricing tier for its branded credit cards. Previously, MasterCard's fees were based on three tiers: one for the most basic cards and two additional, higher-priced categories for cards offering a variety of awards to customers, including concierge services, event tickets and more. Now, MasterCard is splitting the basic tier into two groups with scores of different rates to take effect in June.
MasterCard's complex overhaul – outlined in a 100-page fee schedule – makes it difficult to determine if the new rates, on average, are higher than previous rates.
The Merits of Litigation
Approximately 40 interchange fee-related cases were recently consolidated in the Eastern District of New York (Brooklyn). The ultimate goal of the lawsuits against Visa, MasterCard, Bank of America, Citibank, Bank One, Chase Manhattan Bank, JPMorgan Chase, Fleet Bank, Capital One and other major banks is to stop the alleged anti-competitive practices plus recoup damages. The case is not expected to go to trial, though, until 2008 at the earliest.
According to Duncan, litigation often spurs change. In 1997, the NRF, Food Marketing Institute and Wal-Mart were among the plaintiffs in a class action against the "honor all cards" policies of Visa and MasterCard. Under these policies, a merchant who was accepting Visa credit cards, for example, was required to also accept Visa signature debit cards at the same fee. In April 2003, as the trial was set to begin, the card companies settled and agreed to pay $3.05 billion over a 10-year period into a settlement fund to reimburse retailers for a portion of their debit-card over-charges.
Schlangen was one of countless retailers that benefited from that class action settlement when he received $7,000 for one c-store and $15,000 for another. "It's hard for small, independent businesses to justify spending money on legal fees to fight these credit card companies," he continued. "I would support a class action suit on interchange."
Pierez said that "MasterCard continues to believe that the merchant complaints challenging interchange are without merit. The fact is that accepting payment cards provides merchants with an incredible value at a fair price."
Bentz noted that litigation related to interchange is in the early discovery process. "Despite these suits, we will continue to focus on making the Visa payment system better for merchants, as well as financial institutions and cardholders," he said.
As the interchange issue awaits legal and political intervention, other interested parties are providing alternatives and trying to secure a piece of the pie. For example, ACH-based (Automated Clearing House) payments are gaining momentum within the 150 billion dollar credit-card industry.
San Mateo, Calif.-based Tempo Payments Inc. provides retailers a low-cost alternative to Visa and MasterCard. According to Anthony Ruebner, vice president, a $50 charge at a gas station handled by Visa or MasterCard would result in a $1 interchange fee (approximately 2 percent). With Tempo, the charge to the retailer would be 15 cents.
In October, Wawa Inc., operating more than 550 stores in the mid-Atlantic region, joined the payment network "Debitman," and initiated a pilot phase in the Pennsylvania and Maryland markets.
"Debitman provides us with the opportunity to reduce the cost of credit- and debit-card interchange fees, enabling us to share the savings with our customers through an easy-to-use cash rebate program," said Bob Riesenbach, Wawa's manager of new initiatives.
ACH-based transactions provide "options for retailers," said Duncan. "Congress and courts can level the playing field, which would make alternatives like ACH-payments more effective."