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Credit card fees cut into store profits: Many stores want lower fees, which could be a savings for customers
(Paducah Sun, The (KY) Via Acquire Media NewsEdge) Jan. 25--Driver's Grocery and Deli owner David Rogers shuns credit cards, rather than pass the 5 percent user fees on to his customers.
Those charges would push the cost of a $3.50 sandwich to $3.68. Driver's sandwiches are cheaper than the typical sandwich shop, which pays about $10,000 each year in credit card processing fees, according to Transparent Financial Services of Chicago, an online comparison-shopping firm for small business financial services.
"Credit cards are so much of a problem that I don't use them," Rogers said. "I'm trying to keep costs down for the consumer, and there's no way I can do that accepting credit cards."
Fees to credit card issuers amount to about $2 for every $100 spent electronically. They range from 1.5 percent of a bag of groceries to 19 percent of a pack of gum, depending on the purchase size and type of store, TFS says.
The National Retail Federation projected the average family paid $427 in interchange fees in 2008, up from $378 in 2007. The amount nearly tripled from the $159 paid in 2001, the year NRF began tracking interchange.
Total interchange collections were projected at $48 billion last year, up from $42 billion last year and $16.6 billion in 2001.
Lobbying
The NRF leads the Merchants Payment Coalition, a Washington-based retailers group that in December urged the Federal Reserve to examine how "hidden" interchange fees are set and how they ultimately affect consumers. Visa and MasterCard, which control nearly 80 percent of the credit card market, refuse to negotiate fees, the NRF said.
The group says Visa and MasterCard effectively force merchants to pass the fees on to consumers by requiring them to be included in the advertised price of items and making cash discounts difficult. Only 13 percent of the fees pays transaction costs, while the rest goes to things like credit card junk mail, according to the coalition.
Representing nearly 100 groups and 2.7 million stores, the coalition also hopes that with increased banking scrutiny, Congress will pass a law this year to make the fee system more transparent and competitive. Members include the Kentucky Grocers Association, Kentucky Association of Convenience Stores and Illinois Retail Merchants Association.
A bill introduced in March 2008 would have forced banks issuing credit cards to negotiate fees with merchants. It stalled in the Senate after coming out of the House Judiciary Committee last summer.
Big lenders and their trade associations mounted opposition by forming the Electronic Payments Coalition, which argued the legislation would control prices and restrain trade. The group garnered support including the 362,000-member National Taxpayers Union, which called the bill "unwarranted and massive government intrusion into the marketplace."
Visa and MasterCard lawyers testified before the Judiciary Committee in May that fees allow banks to recover operating costs and are low considering cards' convenience.
Visa General Counsel Joshua Floum said the rates are posted on Visa's Web site and have hovered around 1.6 percent for a decade while total fees have increased with greatly increased credit and debit card use. He said Visa doesn't issue cards or set rates, and stores can and should negotiate discounts with banks.
A month after the hearing, Visa announced it would voluntarily ease interchange fees charged to gas stations amid record high gas prices.
Before the committee, MasterCard's Joshua Perez touted the April 2007 capping of interchange fees on gasoline transactions above $50.
Earlier this month, MasterCard issued a paper dispelling myths about the fees. Among other things, the company said rates have risen only 1.9 percent since 1990, well below inflation.
Convenience stores
Convenience store sales reached a new high of $577.4 billion in 2007, but profits sagged $1.4 billion, largely because of higher credit card fees, according to the National Association of Convenience Stores. Figures for 2008 are pending.
NACS estimated the 146,000 U.S. convenience stores paid $7.6 billion in credit card fees -- $52,064 per store or more than twice the average $23,287 pre-tax profit. The fees amounted to about 1.3 percent of total revenue, the second-largest operating expense behind labor.
The association said the industry's biggest concern was escalating credit card fees, which rose 15.2 percent from $6.6 billion to $7.6 billion.
"Some days you might be selling gas at 2 or 3 cents per gallon profit if there's stiff competition," said Bob Hill, owner of Kentucky Tobacco Outlet on Park Avenue. "Credit card charges cut heavily into that."
Hill is negotiating for lower fees, but says issuers tend to stick together on rates. One company told his bookkeeper there are different rates for different users, he said.
"You can look around and tell they've kind of made a pact," he said. "I think government regulation would mandate getting a break based on volume or usage."
Convenience stores make most of their money off sundries -- small items such as gum that have very high credit card fee ratios. Hill said he relies heavily on tobacco sales to increase volume and help lower the percentage of fees to profits.
Other retailers
Credit card usage has increased substantially since Owen Cleaners began accepting cards eight years ago. Fees typically are 1.75 to 3 percent of the amount charged plus 10 to 25 cents per transaction, said David Perry, company president.
"We end up paying 4 or 5 percent total on smaller-dollar transactions," he said.
Perry said fees keep rising directly with increased credit card use, but cards are more convenient for merchants and customers.
They're safer and less costly than handling cash, and quicker and less troublesome than dealing with checks, he said.
Owen Cleaners tries to negotiate fees and bundle orders to reduce the fee ratio for higher-dollar transactions reduce the fee ratio, Perry said.
"Wal-Mart has the clout and business to do that," he said. "But the average small merchant is very limited in negotiating power."
Joe Walker can be contacted at 575-8656.
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Copyright (c) 2009, The Paducah Sun, Ky.
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