June 26, 2007
CSD: Relief from Credit Card Costs
By Michael Ferrari
Through a special arrangement, what follows is an excerpt of a current article from Convenience Store Decisions magazine presented here for discussion.
It’s no secret that the cost of accepting credit cards is reaching dire new heights. According to the National Association of Convenience Stores (NACS) State of the Industry report, credit card processing fees cost retailers an estimated $6.6 billion in 2006 – over $1 billion more than the prior year.
While not accepting credit cards to avoid lofty costs is not an option for any retailer expecting to drive fuel volume and stay competitive, there is relief to be found.
On the “basics” level, stores should make sure transactions are qualified for the best rates from Visa and MasterCard. Retailers can check monthly or quarterly statements and focus on fixing the downgraded transactions. Penalties may be assessed for not providing the qualification requirements for a particular sale. Also, manually entering a card number when a card reader is malfunctioning often leads to additional penalties.
A second way to reduce transaction fees is through store credit or debit cards. Wisconsin-based Kwik Trip developed a proprietary credit card internally without third-party involvement.
“It costs us about half as much to process our cards then it does to process any other [major credit card],” said Jeff Wrobel, controller for Kwik Trip.
A similar method is combining Automated Clearing House (ACH) networks with a loyalty program to create a secure debit card program. This can enrich a store’s loyalty program too.
“If you can transfer some of the savings gained from ACH Debit transactions and give that to loyalty customers, those customers will be open to using ACH Debits,” said Pat Lewis, partner for Idaho-based Oasis Stop N Go stores and CEO of KickBack Rewards Systems.
Indeed, one potential downside is that customers frequently require tangible incentives to use store credit or debit cards over major credit cards.
Finally, retailers and lobbyists, led by the Merchant’s Payment Coalition (www.unfaircreditcardfees.com), are fighting excessive credit card fees head-on. Looking at costs similar to interchange fees on the lobbying front may help as well.
For instance, David Bishop of Willard Bishop notes that moist smokeless tobacco (MST) uses a similar calculation method – albeit for taxing purposes – as credit card issuers.
“As the industry works hard to lobby for changes in how credit fees are assessed, they should be also aware of the opportunity to gain near-term relief by also supporting weight-based taxation in MST,” recommended Mr. Bishop. “In both situations, retailers have a right to improve the business conditions impacting their ability to earn a profit.”
Discussion Questions: Of the suggestions mentioned, which are the most feasible for retailers to reduce credit card transactions fees? Which aren’t? Do the options differ for larger and smaller retailers?
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Because there is no reasonable alternative choice to accepting credit cards for many merchants and because the consumer ultimately pays the fee, this is becoming a social issue and this is exactly what our government was built to protect the consumer from. What are they doing to protect the consumer in what is essentially a monopoly due to no reasonable competitive choice, deceptive practices, etc.? We are led to believe that the default rate is the reason for these fees, and if that is true, it is the credit card companies fault because they are making the credit decisions that lead to high-risk lending. The consumers who have not yet defaulted are paying based on those decisions.
Where is the FTC? Bring ’em on!
Mr. Dennis, I work for a c-store chain and our employees can count change and we do offer a discount for cash. Credit card fees are our third largest expense behind payroll and rent. They have increased over 30% from 2005-2006. The discount works, but really all you are doing is diverting the money from the credit card company to the customer. There are real problems with credit card fees–mainly that the vendor has no idea how they are charged!
Sorry, I don’t have any sympathy here. I am supposed to feel sorry for a group who charges me a dollar for a thirty cent soda? Give us all a break. If these guys were serious about reducing costs they would offer a discount for cash. But they can’t do that because they would have to hire employees that can make change. Who do they think is paying the fees anyway? The stores aren’t–the customers are! Are the C-stores going to lower cost if the fees are lowered? I don’t think so!
2,000 retail companies are members of Retex, a nonprofit co-op, which uses group volume to get low credit card fees. In unity there is strength. The banks joined together years ago to own the credit card networks. Retailers have to join together in response, or their negotiating power is minimal. A year ago, Mastercard went public around $45. Today it’s $162. How many retail stocks have this kind of track record? Which has more profit: financial services or retail stores?
The article is informative, and my comments are intended to augment the solutions available to Convenience Stores and a host of other retailers. For example, there is an opportunity for all Convenience Stores, or any purveyor of retail food for that matter, such as grocery stores and/or quick service restaurants, and a host of other SIC codes such as movie theaters, car washes, etc., to be able to reduce their costs on transactions under $25 while not having to capture a customer signature, without chargeback liability on these transactions, thus speeding the customer out the door with a savings of eight seconds per transaction. In regards to the private label credit card by Kwik-Trips, I wrote an article on a new pin-based credit card that effectively cuts costs 75-80%, and has a rate of .50% without any transaction fee. Here is a link to the article I wrote for the hotel industry.
As I understand the challenge for convenience store operators, especially those offering fuel service, the rising fuel costs have pushed many fuel transactions into a new category. For example, it may have been the norm that fill-ups were under $30 and the credit card companies would accept “unsigned charges” up to $30 for one fee and expect a signature or a higher fee for chargers over $30. Now that most fill ups are over $30 these charges are getting completely out of hand.
We keep reading and hearing about the negative savings rate of the US consumer. So, people are obviously making use of their credit cards, home equity, or some other source of cash besides earnings to keep up their current spending. This means they don’t just use their credit cards for convenience, they are many times using them to enable the transaction in the first place. For this reason I don’t know that it makes sense to change the basis for the fee to a non-monetary value like using weight for some tobacco tax calculations. Credit cards are used to purchase a variety of products and their only common denominator is the dollar value. The impact of default is the dollar amount that must be paid. It would be interesting to understand the change in default rate over the past year.
I think anyone who has even done a little research into this area must feel that credit card companies are completely out of control. They have obviously gone beyond all reasonableness on both the merchant and the consumer side in their fee assessments. As network capabilities become more prevalent, new services will no doubt become feasible and merchants and consumers will work together to get around the credit card companies. I like the ACH option, because it puts the network to work for the individual merchant and consumer. I can see independent operators becoming “Cash Only” retailers, offering cash and debit based transactions. The ability to cross reference loyalty card numbers to checking accounts makes all the sense in the world. Retail industry groups should work together to make this even easier by supporting members through a common card that can be used across locations. This will allow consumers to pool their purchases while still avoiding credit card companies.
There is a great video on PBS that people unfamiliar with the credit card issue might enjoy.
The documentary was made in 2004, so there are obviously no quick fixes….
This is a very good article that stresses a key cost component for small-to-mid sized retailers. In preparation for our 3rd Quarter market launch, we have been conducting market research and focus groups within the C-store industry and with many small to mid sized retailers. The pain of credit/debit card fees is very real.
We are exploring alternative solutions such as National Payment Card, Tempo Payment Card, and Gratis Card, which reduce interchange fees for the smaller retailers and allow us to convert that to significant cents off at the pump. This creates a loyalty solution for smaller retailers, paid for by the reduction of interchange fees.
We see the future moving to the ACH model. We constantly hear complaints from our coalition loyalty clients regarding credit card fees. We have found consumers don’t want to carry a multitude of cards for each and every store they frequent regardless of savings. We feel that if you can get consumers to carry a single card that is accepted across multiple merchants, can be charged with reward dollars in a loyalty program, and also used as a loadable gift card is the best answer. Then Merchants can get consumers to use the cards as a means of payment and save on transaction fees. We have found the biggest challenges in such a program is to get smaller retailers to actually market it and to keep the larger retailers from thinking they can do it on their own.
I have to agree with Bill on this one. Credit card fees and the relationships they have with their retail partners is not one of my specialties. However, speaking as a consumer, I use my credit card for pretty much everything. So, I would be very much opposed to my favorite retailer going “cash only.” However, at the same time, there are many creative ways to offer alternatives. I like the idea of offering discounts to cash only…. and I think the idea of a proprietary credit card, in conjunction with a well-maintained loyalty program, will offer retailers a good reason to rethink the way they pay.
I must admit that I recently signed up for a Jet Blue credit card. Not a fan of using anything else but our traditional “family” credit card. However, Jet Blue offers good rewards with their card, and thus forces me to change the way I think about making purchases.
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Because there is no reasonable alternative choice to accepting credit cards for many merchants and because the consumer ultimately pays the fee, this is becoming a social issue and this is exactly what our government was built to protect the consumer from. What are they doing to protect the consumer in what is essentially a monopoly due to no reasonable competitive choice, deceptive practices, etc.? We are led to believe that the default rate is the reason for these fees, and if that is true, it is the credit card companies fault because they are making the credit decisions that lead to high-risk lending. The consumers who have not yet defaulted are paying based on those decisions.
Where is the FTC? Bring ’em on!
Mr. Dennis, I work for a c-store chain and our employees can count change and we do offer a discount for cash. Credit card fees are our third largest expense behind payroll and rent. They have increased over 30% from 2005-2006. The discount works, but really all you are doing is diverting the money from the credit card company to the customer. There are real problems with credit card fees–mainly that the vendor has no idea how they are charged!
Sorry, I don’t have any sympathy here. I am supposed to feel sorry for a group who charges me a dollar for a thirty cent soda? Give us all a break. If these guys were serious about reducing costs they would offer a discount for cash. But they can’t do that because they would have to hire employees that can make change. Who do they think is paying the fees anyway? The stores aren’t–the customers are! Are the C-stores going to lower cost if the fees are lowered? I don’t think so!
2,000 retail companies are members of Retex, a nonprofit co-op, which uses group volume to get low credit card fees. In unity there is strength. The banks joined together years ago to own the credit card networks. Retailers have to join together in response, or their negotiating power is minimal. A year ago, Mastercard went public around $45. Today it’s $162. How many retail stocks have this kind of track record? Which has more profit: financial services or retail stores?
The article is informative, and my comments are intended to augment the solutions available to Convenience Stores and a host of other retailers. For example, there is an opportunity for all Convenience Stores, or any purveyor of retail food for that matter, such as grocery stores and/or quick service restaurants, and a host of other SIC codes such as movie theaters, car washes, etc., to be able to reduce their costs on transactions under $25 while not having to capture a customer signature, without chargeback liability on these transactions, thus speeding the customer out the door with a savings of eight seconds per transaction. In regards to the private label credit card by Kwik-Trips, I wrote an article on a new pin-based credit card that effectively cuts costs 75-80%, and has a rate of .50% without any transaction fee. Here is a link to the article I wrote for the hotel industry.
As I understand the challenge for convenience store operators, especially those offering fuel service, the rising fuel costs have pushed many fuel transactions into a new category. For example, it may have been the norm that fill-ups were under $30 and the credit card companies would accept “unsigned charges” up to $30 for one fee and expect a signature or a higher fee for chargers over $30. Now that most fill ups are over $30 these charges are getting completely out of hand.
We keep reading and hearing about the negative savings rate of the US consumer. So, people are obviously making use of their credit cards, home equity, or some other source of cash besides earnings to keep up their current spending. This means they don’t just use their credit cards for convenience, they are many times using them to enable the transaction in the first place. For this reason I don’t know that it makes sense to change the basis for the fee to a non-monetary value like using weight for some tobacco tax calculations. Credit cards are used to purchase a variety of products and their only common denominator is the dollar value. The impact of default is the dollar amount that must be paid. It would be interesting to understand the change in default rate over the past year.
I think anyone who has even done a little research into this area must feel that credit card companies are completely out of control. They have obviously gone beyond all reasonableness on both the merchant and the consumer side in their fee assessments. As network capabilities become more prevalent, new services will no doubt become feasible and merchants and consumers will work together to get around the credit card companies. I like the ACH option, because it puts the network to work for the individual merchant and consumer. I can see independent operators becoming “Cash Only” retailers, offering cash and debit based transactions. The ability to cross reference loyalty card numbers to checking accounts makes all the sense in the world. Retail industry groups should work together to make this even easier by supporting members through a common card that can be used across locations. This will allow consumers to pool their purchases while still avoiding credit card companies.
There is a great video on PBS that people unfamiliar with the credit card issue might enjoy.
The documentary was made in 2004, so there are obviously no quick fixes….
This is a very good article that stresses a key cost component for small-to-mid sized retailers. In preparation for our 3rd Quarter market launch, we have been conducting market research and focus groups within the C-store industry and with many small to mid sized retailers. The pain of credit/debit card fees is very real.
We are exploring alternative solutions such as National Payment Card, Tempo Payment Card, and Gratis Card, which reduce interchange fees for the smaller retailers and allow us to convert that to significant cents off at the pump. This creates a loyalty solution for smaller retailers, paid for by the reduction of interchange fees.
We see the future moving to the ACH model. We constantly hear complaints from our coalition loyalty clients regarding credit card fees. We have found consumers don’t want to carry a multitude of cards for each and every store they frequent regardless of savings. We feel that if you can get consumers to carry a single card that is accepted across multiple merchants, can be charged with reward dollars in a loyalty program, and also used as a loadable gift card is the best answer. Then Merchants can get consumers to use the cards as a means of payment and save on transaction fees. We have found the biggest challenges in such a program is to get smaller retailers to actually market it and to keep the larger retailers from thinking they can do it on their own.
I have to agree with Bill on this one. Credit card fees and the relationships they have with their retail partners is not one of my specialties. However, speaking as a consumer, I use my credit card for pretty much everything. So, I would be very much opposed to my favorite retailer going “cash only.” However, at the same time, there are many creative ways to offer alternatives. I like the idea of offering discounts to cash only…. and I think the idea of a proprietary credit card, in conjunction with a well-maintained loyalty program, will offer retailers a good reason to rethink the way they pay.
I must admit that I recently signed up for a Jet Blue credit card. Not a fan of using anything else but our traditional “family” credit card. However, Jet Blue offers good rewards with their card, and thus forces me to change the way I think about making purchases.