Friday, September 30, 2005
Interchange is the largest component of credit-card fees and has a significant impact on American consumers, who are affected by interchange rates that are among the highest in the world. These rates cost the average American household approximately $232 a year in 2004.
When consumers purchase goods or services with a credit card, the payment is processed through the merchant's bank and the bank that issued the consumer the credit card. The issuing bank charges the merchant's bank a fee to process the transaction. The merchant's bank then adds its own fee for processing the transaction, and passes on both of these fees, collectively known as interchange, to the merchant.
"The credit-card interchange system serves as a hidden tax, both on merchants and consumers, and raises the costs of all products regardless of the form of tender," said NACS CEO Hank Armour. "
And these credit-card interchange fees have rapidly increased over the past several years, despite efforts by individual convenience stores to control these costs or make the competitive market work."
Interchange fees are meant to cover the cost of processing a credit-card transaction and the risk taken by the issuing bank that the credit will not be repaid. However, NACS and the other the plaintiffs say that both fraud costs and the cost of processing are steadily decreasing, while U.S. interchange rates continue to increase.
Interchange fees are substantially higher in the United States than almost any other industrialized country. Other countries have taken action to address the market problem created by these monopolies. Recent changes in Australia and countries in Europe, for example, have decreased rates from about 0.95 percent to about 0.55 percent.
"We are not seeking some form of temporary relief; we are looking for long-term reform of the credit-card interchange fee system," said John Rector, NCPA general counsel.
"The current system discriminates against small, independent businesspersons, and there is no basis for that discrimination. We ultimately seek a competitive and fair interchange fee system.
Interchange is much higher in the United States than any other country, and there is no legitimate basis for that."In May 2005, The Merchants Payments Coalition Inc. (MPC), a broad coalition of business organizations, including NACS, applauded the Federal Reserve Bank of Kansas City for holding a conference on credit and debit card interchange fees, saying that the rapidly escalating fees amount to a hidden tax on U.S. consumers."
The fees that the credit-card companies charge defy logic and they are using them to increase profits far more than to provide any meaningful benefits to retailers," said NACS senior vice president for research Teri Richman, who serves as the MPC secretary."
Credit-card company rules and some state laws effectively prohibit retailers from providing discounts for cash or checks in all but a handful of situations. As a result, consumers pay more even when they don't use their cards. It's time for this constant picking of consumers' pockets to come to an end," Richman said.
(source: Convenience Store News)
Thursday, September 29, 2005
The federal courts should consolidate 14 lawsuits from merchants seeking to force some of the nation's leading credit card issuers to lower their fees, defense attorneys argued Thursday in a hearing before a seven-judge panel.
Attorneys for the plaintiffs, which include the country's largest merchants associations, wanted some of the cases to be argued separately. They also argued that the case should be moved to New York, while defense lawyers want the case heard in Atlanta.
The seven-judge panel chaired by U.S. District Judge William Terrell Hodges of Florida did not issue a decision at the end of the hearing and did not indicate when a ruling might come." We will take the matter under submission," Hodges told the attorneys, repeating the same phrase he uttered at the end of 11 unrelated cases that went before the Judicial Panel on Multidistrict Litigation.
The credit card lawsuits pit some of the nation's largest merchant associations and retailers, including Walgreen Co. and Safeway Inc., against credit card issuers such as Visa USA, MasterCard Inc., and a number of major banks, including Citigroup Inc., Bank of America Corp. and JPMorgan Chase.
Last week, four merchant associations filed a new class action suit in New York, accusing the defendants of engaging in collusive practices in setting interchange fees. The suit asked for an injunction to stop the alleged collusion as well as unspecified damages.
The plaintiffs in that suit - the National Association of Convenience Stores, the National Association of Chain Drug Stores, the National Community Pharmacists Association and the National Cooperative Grocers Association - represent thousands of merchants nationwide. The plaintiffs claim interchange fees, which are paid by the merchants each time a customer uses a debit or credit card, are passed down to consumers in higher prices.
In 2004, they estimated interchange fees cost the average American household about $232 a year.
In June, the first major interchange lawsuit was filed by the firm of Robins, Kaplan, Miller & Ciresi LLP on behalf of 30 Minute Photos Etc. of Irvine, Calif., and several other small retailers, in federal court in Connecticut.
The same law firm also filed the latest merchant suit in U.S. District Court for the Eastern District in New York. In July, seven big retail chains led by Kroger Co., Albertson's Inc. and Safeway, filed a price-fixing suit against Visa in federal court in Manhattan. Plaintiffs in similar cases have had some success in the courts in recent years. In 2003, Visa and MasterCard agreed to pay $3 billion to retailers and to reduce the fees it charged for debit card transactions. Two years earlier, a federal court in Manhattan required Visa and MasterCard to drop rules that prohibit their member banks from also issuing American Express or Discover Cards.
The case, brought by the Department of Justice, eventually was appealed by the card associations to the U.S. Supreme Court. The Supreme Court declined to review the case in 2004
(Source: The Dispatch)
Wednesday, September 28, 2005
NATSO, the trade association representing America's travel plaza and truck stop industry, will join other merchant associations in a class-action lawsuit that alleges that Visa USA, MasterCard International and a number of major banks are engaging in collusion in setting interchange fees.Credit card fees have greatly increased in recent years, and the interchange portion of that fee – set by Visa, MasterCard and banks – is one of the highest in the world, averaging an estimated 1.7 percent.
When a travel plaza accepts a credit or debit card in return for products or services, the transaction is processed through its bank and the issuer of the credit card. Both the issuing bank and the travel plaza's bank charge "interchange" fees for processing the transaction, and these fees are paid by the travel plaza operator.
Although interchange fees, which amount to $20-24 billion, are charged to cover the costs of credit risk and transaction processing, the fees have greatly increased throughout the years, while costs have declined.
The suit, which seeks injunctive relief as well as damages, was filed in the U.S. District Court for the Eastern District of New York on Sept. 23 by the law office of Robins, Kaplan, Miller and Ciresi. They acted on behalf of the National Association of Convenience Stores, National Association of Chain Drug Stores, the National Community Pharmacists Association and the National Cooperative Grocers Association.
[source: eTrucker News]
Tuesday, September 27, 2005
Credit card firms, including Visa and Mastercard, are under increasing attack over their fees, with the largest US merchant groups now joining the fray. (BBC NEWS)
Four groups representing retailers have filed a class action law suit accusing card issuers of colluding to fix fees.
The merchants are seeking billions of dollars in damages.
Visa and Mastercard, which have already come under fire in the US and UK for their business practices, deny any wrongdoing and defend their charges.
The legal action has been brought by the National Association of Convenience Stores, the National Association of Chain Drug Stores, the National Community Pharmacists Association and the National Cooperative Grocers Association.
Credit card interchange fees are the third-largest expense for many chain drug stores after rent and the cost of labour Craig Fuller Chief executive National Association of Chain Drug Stores MasterCard said that the legal action is "without merit", adding that the retailers wanted "the benefits of accepting payment cards without having to pay for the value of the services they receive".
Visa said it was confident it would be able to defend its fees, calling them "fair". A number of banks also have been named in the law suit, including Citigroup, Bank of America, and JPMorgan Chase.
At the heart of the battle are the interchange fees charged by credit card companies. A retailer has to pay a fee of about 1.7% of the total value of goods in order to get payment from the credit card company.
The merchants complain that this is rate is more than double the rate paid in Europe and Australia, and that the fee is being used to underwrite promotional offers at the credit card firms.
They estimated that the card companies' interchange fees cost the average US family $232 (£131) during 2004.
"Credit card interchange fees are the third-largest expense for many chain drug stores after rent and the cost of labour," said Craig Fuller, chief executive of the National Association of Chain Drug Stores.
Visa and MasterCard have previously been embroiled in lengthy legal battles regarding their fees and business practices.
In 2003, Visa and Mastercard agreed to pay about $3bn to settle a legal action brought by retailers who argued that they were forced to accept higher-cost, signature-verified debit cards. Last year, the US Supreme Court upheld a decision that found Visa and Mastercard were wrong to stop member banks from issuing credit cards on rival networks such as Discover and American Express.
In the UK, meanwhile, the Office of Fair Trading (OFT) accused Mastercard and the banks issuing its credit cards of overcharging customers. Mastercard has changed its fee charging practices in the UK and said it plans to appeal the OFT's decision.
(source: BBC News, World Edition)
By Martin H. Bosworth - ConsumerAffairs.Com
September 27, 2005 Visa and MasterCard, along with major banks such as Capital One and Bank of America, face an accelerating legal challenge by merchants ranging from chain stores to photo shops to grocers.
The lawsuits allege that major banks and the Visa and MasterCard associations charge excessive "interchange fees" to retailers when customers pay for goods using a Visa or MasterCard.
Retailers have to pay the interchange fees in order to receive payments from transactions made using those cards, and the plaintiffs claim the fees are disproportionately high compared to the money they receive from the transaction.
The costs of the interchange fees are passed on to consumers, who have to pay more for goods without realizing it. Mitch Goldstone, CEO of Irvine, CA-based 30 Minute Photos Etc., one of the original lawsuit plaintiffs, has called it a "hidden tax" on consumers.Goldstone filed the first major lawsuit in June of 2005.
Major grocery chains such as Kroger's and Safeway filed their own litigation in July 2005. Retail store associations, including the National Association of Chain Stores (NACS) and the National Association of Chain Drug Stores (NACDS), then filed a class-action antitrust suit this month.
The various lawsuits now go to a Multi-District Litigation (MDL) hearing on Sept. 29th in Asheville, North Carolina. The MDL hearing will determine what form the lawsuits will take and how they will proceed.
Goldstone told ConsumerAffairs.Com the lawsuits are "the biggest litigation since AT&T in the late '80's."
His crusade started when he received a notice from MasterCard that his interchange fee for frequent-flyer card usage was going up. "I sent letters, cards, and e-mails asking for them to rescind this fee. No response…I didn't anticipate being the lead plaintiff in a case this big."
Goldstone views the lawsuit as standing up for retailers and consumers who are forced to shore up banks' profits.
"Retailers are beholden to credit card companies. We've moved so far to an e-commerce model that if I don't accept credit cards, I'm out of business."
Visa and MasterCard, he said, enjoy the benefits of a "noncompetitive" situation, where "a mother going out for a gallon of milk is subsidizing a wealthy customer's free flight," because they're paying the same rates for goods, even if the mother pays cash or writes a check.
Jeff Lenard, spokesperson for NACS, concurred. "This is an imbalance between fees and economics," he stated. "If you look at other countries' [interchange fee] rates, they're far lower than ours. Why are they so much higher in the United States?"
The, in both Lenard's and Goldstone's views, is to move to a "cost-based interchange" system with "no other component or profit" attached. "Ultimately," Lenard stated, "this hits our bottom line."
Credit card companies and banks are already reaping tremendous windfalls from the interchange fees levied when drivers use credit cards to pay for gas.
The Washington Post reported on Sept. 25th that banks' fees for credit card purchases of gas have risen by 64 percent since last year, generating huge profit while forcing gas station owners to eat up more of the costs of processing fees, and leaving consumers paying higher and higher prices.
"Credit card companies are making 8 or 9 cents a gallon" off the fees, says Lenard.
Despite gorging on interchange fees, many large financial services companies face a cloudy future. Homeowners are using home equity loans to pay down debt and buy items usually reserved for credit cards, while cardholders are paying off their debts faster and in greater amounts. MBNA has already felt the backlash of lost revenue, leading to its buyout by Bank of America.
As one insider analyst put it in an interview with Reuters, "You've got consumers and merchants revolting. They're the two customers of this industry ... That's not good."
Goldstone theorizes that the rush to set up credit card companies for initial public offerings (IPOs) is a way for them to "throw off liability onto the consumer." As profits drop and consumer anger grows, "you'll see a lot of them running to the exit as quickly as possible."
Goldstone runs an online blog, WayTooHigh.com, which tracks the daily updates of the lawsuit. "Since this case started," he says, "I haven't received a single negative complaint."
Monday, September 26, 2005
NACS was one of four major merchant associations that on Friday, September 23, 2005, filed an antitrust, class-action lawsuit alleging that Visa, MasterCard, Bank of America, Citibank, Bank One, Chase Manhattan Bank, J.P. Morgan, Chase, Fleet Bank, Capital One, and other banks are engaging in collusive practices by setting credit card interchange fees at supracompetitive levels.
The suit was filed in the U.S. District Court for the Eastern District of New York by Robins, Kaplan, Miller & Ciresi LLP.NACS and the other plaintiffs--the National Association of Chain Drug Stores (NACDS), the National Community Pharmacists Association (NCPA) and the National Cooperative Grocers Association (NCGA)--represent hundreds of thousands of drug stores, convenience stores and food stores across the United States that accept Visa and MasterCard as a form of payment.
In addition, the case, as a class action lawsuit, represents millions of card-accepting retailers in the U.S.
The next stop for the NACS et. al. litigation will be Asheville, NC, on Thursday, September 29, 2005, when the more than 30 cases now filed against either VISA, MasterCard and banks will be reviewed by a panel during a Multi District Litigation (MDL) hearing. The purpose of the hearing is to hear arguments from the plaintiffs and defendants on how and where these cases should be consolidated and adjudicated.
There are differing opinions between plaintiffs and defendants on which court is the best venue for the cases and the MDL hearing is the process that sorts this issue out. For the NACS et. al. class action matter, the preferred venue is the second circuit, Eastern District of New York, which is the same court that handled the Wal-Mart case that settled in 2003.
In the United States, interchange is the largest component of credit card fees and has a significant impact on American consumers, who are affected by interchange rates that are among the highest in the world. Interchange rates cost the average American household approximately $232 a year in 2004.When consumers purchase goods or services with a credit card, the payment is processed through the merchant’s bank and the bank that issued the consumer the credit card. The issuing bank charges the merchant’s bank a fee to process the transaction.
The merchant’s bank then adds its own fee for processing the transaction, and passes on both of these fees--collectively known as interchange--to the merchant. “The credit card interchange system serves as a hidden tax, both on merchants and consumers, and raises the costs of all products regardless of the form of tender,” said NACS CEO Hank Armour.“
And these credit card interchange fees have rapidly increased over the past several years, despite efforts by individual convenience stores to control these costs or make the competitive market work.” Interchange fees are meant to cover the cost of processing a credit card transaction and the risk taken by the issuing bank that the credit will not be repaid. However, NACS and the other the plaintiffs say that both fraud costs and the cost of processing are steadily decreasing, while U.S. interchange rates continue to increase.
Interchange fees are substantially higher in the United States than almost any other industrialized country. Other countries have taken action to address the market problem created by these monopolies. Recent changes in Australia and countries in Europe, for example, have decreased rates from about 0.95 percent to about 0.55 percent.“
Credit card interchange fees are the third-largest expense for many chain drug stores after rent and the cost of labor,” said NACDS CEO Craig Fuller. "These costs have skyrocketed over the past years even though the costs of credit card transactions for the banks have fallen. NACDS weighed many options in dealing with this issue and decided to seek litigation only after careful deliberations, with the ultimate recognition that it was necessary for the long-term reform of the system,” added Fuller. The suit’s plaintiffs added they would seek damages and injunctive relief to stop the alleged anticompetitive practices of banks and credit card companies.“
We are not seeking some form of temporary relief; we are looking for long-term reform of the credit card interchange fee system,” said John Rector, NCPA general counsel. “The current system discriminates against small, independent businesspersons, and there is no basis for that discrimination. We ultimately seek a competitive and fair interchange fee system.
Interchange is much higher in the United States than any other country, and there is no legitimate basis for that.
”In May 2005, The Merchants Payments Coalition Inc. (MPC), a broad coalition of business organizations, including NACS, applauded the Federal Reserve Bank of Kansas City for holding a conference on credit and debit card interchange fees, saying that the rapidly escalating fees amount to a hidden tax on U.S. consumers. “
The fees that the credit card companies charge defy logic and they are using them to increase profits far more than to provide any meaningful benefits to retailers,” said NACS Senior Vice President for Research Teri Richman, who serves as the MPC secretary.“
Credit card company rules and some state laws effectively prohibit retailers from providing discounts for cash or checks in all but a handful of situations. As a result, consumers pay more even when they don’t use their cards. It’s time for this constant picking of consumers’ pockets to come to an end,” stressed Richman.
The Merchants Payments Coalition is made up of trade associations representing retailers, restaurants, supermarkets, drug stores, convenience stores, gas stations, on-line merchants and other businesses that accept credit and debit cards and are concerned about the increasing interchange fees charged by banks and credit card companies to process credit and debit transactions.
A number of the associations were involved in antitrust litigation settled in 2003 that forced Visa and MasterCard to lower interchange rates for signature debit transactions. The coalition estimates that interchange collected from its members accounts for about one-quarter of U.S. interchange.NACS has focused on the issue of escalating credit card fees since 2002. At the NACS Show 2003, NACS, in partnership with First Data Corporation, introduced the NACS Card Processing Program to reduce participating members’ processing fees through processing efficiencies and the aggregation of their transactions with NACS members and others in the industry.
NACS estimates that participating companies can expect to save, on average, $4,250 per store per year. “This ‘interchange plus’ program provides retailers a program that charges cents per transaction versus a percentage of the transactions, saving them real money,” notes Gray Taylor, NACS vice president of research. A major advantage of the cents-per transaction approach is that as the dollar value of the transaction grows (such as with the rising price of gasoline), the card processing fees remains the same.
By Steve Gelsi, MarketWatch Last Update: 3:02 PM ET Sept. 26, 2005
NEW YORK (MarketWatch) -- Four major merchant associations said Monday that they have filed an antitrust lawsuit against Visa, MasterCard and banks that issues credit cards in a growing battle over fees.
The suit alleges that some banks and credit card companies are engaging in "collusive practices" by setting credit-card interchange fees at high levels. Interchange fees are the fees that banks charge retail businesses for credit card transactions.
Mitch Goldstone of 30 Minute Photos Etc., the lead plaintiff in an earlier class action suit against Visa, MasterCard and banks that issue the credit cards, said a suit filed Monday by the retailing groups will likley be combined with his case.
A court hearing has been scheduled for Thursday to combine the suits, he said.
The legal action could amount to the "largest antitrust litigation since AT&T in the early 1980s," Goldstone told MarketWatch.
Goldstone said he expects to keep his position as lead plaintiff in the combined suit, which will be argued by law firm Robins, Kaplan, Miller and Ciresi.
The action Monday was taken by the National Association of Chain Drug Stores, the National Association of Convenience Stores, the National Community Pharmacists Association, and the National Cooperative Grocers Association.
The companies named in the lawsuit include Visa, MasterCard, Bank of America (BAC: news, chart, profile) , Citibank (C: news, chart, profile) , Bank One, Chase Manhattan Bank, J.P. Morgan (JPM: news, chart, profile) , Chase Fleet Bank, and Capital One (COF: news, chart, profile) .
The plaintiffs said they would seek damages and injunctive relief to stop the alleged anticompetitive practices.
A spokesperson for MasterCard could not be reached for comment.
However interchange fees topped the "risks" section of MasterCard's recent initial public offering prospectus filed with regulators on Sept. 15.
"We are devoting substantial management and financial resources to the defense of interchange fees...," MasterCard said in its IPO document. "If (credit card) issuers cannot collect or are forced to reduce interchange fees, they may be unable to recoup a portion of the costs incurred for their services.
"This could reduce the number of financial institutions willing to participate in a four-party payment card system, lower overall transaction volumes, and/or make proprietary end-to-end networks or other forms of payment more attractive.
"Issuers could also charge higher fees to consumers, thereby making our card programs less desirable and reducing our transaction volumes and profitability, or attempt to decrease the expense of their card programs by seeking a reduction in the fees that we charge.
"If we are less successful than Visa in defending interchange fees, we could also be competitively disadvantaged against Visa. If we are ultimately unsuccessful in our defense of interchange fees, such regulation may have a material adverse impact on our revenue, our prospects for future growth, and our overall business."
[Source: Steve Gelsi is a reporter for MarketWatch in New York]
By Steve GelsiNEW YORK (MarketWatch) --
Mitch Goldstone of 30 Minute Photos, Etc., the lead plaintiff in a suit against Visa, MasterCard, and banks that issue the credit cards, said a suit filed Monday by four leading retailing groups will likley be combined with his suit fighting the rise of credit card transaction fees. A court hearing has been scheduled for Thursday to combine the suits, he said. The legal action could amount to the "largest antitrust litigation since AT&T in the early 1980s," Goldstone told MarketWatch.
Several retail groups said on Monday they filed an antitrust lawsuit against credit-card companies Visa, MasterCard and major U.S. banks, saying they acted together and set credit-card interchange fees.
Retail merchants pay interchange fees to issuing banks to receive payments for transactions involving the banks' cards and make up the largest component of credit card fees.
The suit's plaintiffs include the National Association of Convenience Stores, the National Association of Chain Drug Stores, the National Community Pharmacists Association and the National Cooperative Grocers Association. They represent hundreds of thousands of stores across the United States that accept Visa and MasterCard as a form of payment.
Saturday, September 24, 2005
By Margaret Webb Pressler - Washington Post Staff Writer - Sunday, September 25, 2005
As the price of gasoline rides the storm tides of two hurricanes, one group is crying all the way to the bank.
Major credit card companies are reaping huge profits from rising gas prices because the fee that banks charge gas stations to process a credit card transaction is based on a percentage of the purchase price. As gas prices go up, the processing fee goes up.
Since last year, the fees that gas stations paid to credit card companies have risen 64 percent, right along with the price of gasoline.
"It's unexpected revenue, because people are just doing what they were always doing," said David Robertson, publisher of the Nilson Report, a credit card industry newsletter. "It's not like a whole new market opened up. There's no behavioral change. It's just more money." And lots of it.
On a typical day, Americans buy 382 million gallons of gasoline, according to the Energy Department's Energy Information Administration. About 70 percent of that is paid for by credit card, said several trade associations representing gas stations. The credit card processing fees paid by gas stations, meanwhile, average about 2.5 percent, these trade groups agree.
So a year ago, when gas prices averaged $1.87, banks involved in credit card processing made about $12.5 million a day on fees. Now, with prices averaging $2.75 nationally, the credit card companies are raking in $18.4 million a day.
That is $183 million more a month, or nearly $2.2 billion dollars on an annual basis in extra money paid to the nation's banking giants just because of rising gasoline prices.
"The credit card processors and banks are reaping enormous profits right now," said Paul Fiore, director of government affairs for the Washington, Maryland, Delaware Service Station & Automotive Repair Association. "That's right out of the dealer's profit."
Fiore said credit card fees have become the top issue among gas station owners because they have not been able to raise their profit margins to cover the increased fees they must pay to the banks. Typically, a retailer's own bank gets 25 percent of the processing fee, while three-quarters goes to the bank that issued the credit card, said Robertson of the Nilson Report.
The fees are especially burdensome for gas stations, because their profit structure is generally fixed: Stations tack on anywhere from 7 to 11 cents a gallon to get their profit. That margin stays the same, or may even shrink a little, as prices rise, yet the station has to pay more each month to cover rising credit card transaction fees.
Marty Dustin, who manages the Burnt Mills Citgo station in Silver Spring that he and his father own, said rising credit card fees are rapidly eating up the family's entire profit from the business.
"We are not going to be able to make it on that 7, 8, 9 cents [per gallon] because there's more coming out of the back side," he said. "We're all going to have to try and grow our margins a little bit to make up the difference."
But so far, Dustin and others say, the price competition among gas stations is so intense that few stations have been able to raise their margin to make up the difference, or even part of it.
Adding to the difficulty for gasoline retailers is the fact that consumers are using credit cards more often for those costlier gasoline purchases. The National Association of Convenience stores says that since Hurricane Katrina, the percentage of gasoline purchases on plastic has gone up 10 points , to 80 percent.
Each oil company's own branded credit card charges its station owners lower fees, but those cards account for a small -- and decreasing -- percentage of sales at retail gas stations, said Daniel F. Gilligan, president of the Petroleum Marketers Association. Debit cards, too, have slightly lower fees than traditional credit cards but also represent a small portion, about 16 percent, of total card transactions, according to the convenience store association.
It is major credit cards offering frequent-flier miles and rebates that get swiped the most, by far, these groups say.
But there is growing pressure on the industry to rein in its fees.
The lead plaintiff in a class-action lawsuit against the credit card companies for merchant fees has seen a wave of interest in his case because of the gas-purchase profits.
"As gas prices have doubled, so, too, have the earnings for the banks that own the credit card associations," Mitch Goldstone said. "What I proposed to the CEOs of both Visa and MasterCard is to very simply suspend the interchange fees at all service stations."
He got no response, but he has chronicled his battle on his Web site, WayTooHigh.com.
The issue of rising credit card profits also has begun to come up in congressional hearings related to gas prices. In one exchange earlier this month with a gas station owner, Rep. Joe Barton (R-Tex.) remarked that the percentage fee system -- giving the bank more money just because a consumer bought more gas -- "doesn't make a whole lot of sense to me."
Wall Street analysts say that for each individual financial institution, the growing profit from gasoline purchases is not huge compared with the total profit for the companies. Three of the biggest credit card issuers, Citigroup Inc., MBNA Corp. and Capital One Financial Corp., all declined to comment on the increased profits they are getting from gasoline transactions. But banking industry experts say the trend is in keeping with the increasing profits that banks are making in general on consumer fees of all kinds.
In the meantime, said F. Peter Horrigan, president of the Mid-Atlantic Petroleum Distributors' Association, some service stations are fighting back. An increasing number are bringing back discounted prices for cash purchases or even rejecting credit card purchases altogether.
"It is the number one issue in our industry right now," Horrigan said.
(Source: Washington Post)
[WayTooHigh.com Ed Note: While appreciative that both Visa and MasterCard have responded to my Sept 1st letter, neither addressed my request to suspend the interchange fees at gas stations]
Tuesday, September 20, 2005
Tue Sep 20, 2005 4:14 PM ET; By James B. Kelleher, Reuters
MEMPHIS (Reuters) - The U.S. credit-card industry is heading into a "perfect storm" as challenges loom that could trigger a radical reshaping of the business, a group of industry heavyweights told a conference on Tuesday.
Competition from mortgage lenders, lawsuits over transaction fees, growing regulatory scrutiny about consumer disclosures and the almost universal elimination of annual fees are largely to blame for the troubles.
"We're pretty much in the middle of what might be a perfect storm, which I don't think the industry quite understands," said Duncan MacDonald, a former general counsel at Citibank Cards, who now works as an industry consultant.
"You've got consumers and merchants revolting. They're the two customers of this industry ... That's not good."
Analysts said many issuers were responding inappropriately -- fighting merchant lawsuits over so-called "interchange fees" rather than settling and trying to offset stagnant growth by putting what MacDonald characterized as "sneaky pricing" and "tripwires" into credit deals to take advantage of consumers.
"They're confronting the maturation of growth ... by adopting risky strategies," said Ken Posner, an equity analyst and managing director at Morgan Stanley. "I don't see a lot of real innovation."
Not everyone took a dour view of the industry's prospects.
MORTGAGES EMERGE AS RIVALS
Alex Hart, the former chief executive at MasterCard and Advanta
"I think we're on the verge of having a lot less to worry about," he said. But even Hart acknowledged it could take "five to seven years to clear up all the outstanding litigation."
But MacDonald said that merchant lawsuits had eliminated many companies' options, backing the industry into a corner.
He predicted "all hell would break loose" if the companies tried to make up for the lost interchange revenue by raising fees on consumers, Even without the legal challenges, the industry would be facing major problems.
Credit-card use has exploded in the last decade but many consumers don't carry balances from one month to another. That's reduced interest income from receivables. In addition, most credit-card companies -- with the exception of American Express -- have all but eliminated annual fees, another once-reliable source of revenue.
"I think the reality is that this industry has largely commodified," said Posner. "And if you're going to follow a commodity strategy, you better focus on costs."
But the credit-card companies have raised, not lowered, average rates. That's made it easier for mortgage companies to "encroach" on their turf, according to Posner, helping drive the growth rate for receivables to near zero. The net effect? A product that was conceived as a lending vehicle isn't being used that way nearly enough to sustain the business model built upon it.
"At the end of the day, mortgages are just a much cheaper as a way for consumers to borrow . . . I think this industry is taking a permanent bite out of the growth prospects, at least on the receivables side, of the card industry," said Posner.
Monday, September 19, 2005
Four-million "pay-pass" cards are another four-million more reasons to end Interchange fees (Commentary: WayTooHigh.com)
During an industry conference on Monday, MasterCard [as reported by Reuters] explained that its planned IPO would "help quell criticism from merchants and others, who charge that its current structure [which foes characterize as a cartel of competing banks setting transaction fees in concert] represents a violation of U.S. antitrust laws."
Right they are, but it is decades to late.
Selling off part of their legal liability to the public is wrong, but at least they are acknowledging what merchants already know. The problem is that these interchange fees are not nickel and dime indiscretions.
While the banks' illegal antitrust cartel earn billions of dollars in profits each year at the expense of shop owners and mom's buying groceries, their credit card associations are finally being undressed.
Most recently, the card marketers launched an advanced, high-tech radio-frequency "pay-pass" chip so customers can easily transact business by waving their cards near electronic receivers. By year-end there will be four-million "pay-pass" cards saving the banks money, but not consumers because the interchange fees keep on rising.
Soon, your credit card will be part of your cell phone. This will further help lower the banks cost to transact a charge, but don't count of MasterCard and Visa to pass along the savings. As it is, they earn as much as $1.50 everytime you fill up your car; with the speedy "pay-pass" addition, this means they get your money even faster.
Friday, September 16, 2005
And then, as reported by the Associated Press, MasterCard "recently unveiled plans for an initial public offering to help reshape its business during a time of unprecedented competitive and legal challenges. Chairman Baldomero Falcones and President and Chief Executive Officer Robert W. Selander said in a letter to member banks that the IPO was in part formulated to address these legal hurdles.
Wednesday, September 14, 2005
A national consumer group has welcomed the decision by the Office of Fair Trading (OFT) to fine MasterCard for 'taxing' its customers. According to the National Consumer Council (NCC), the OFT's ruling that Mastercard and the banks issuing its credit cards have been deliberately overcharging their customers brings good news for credit card holders.
In an announcement made yesterday, the OFT revealed that purchases made on MasterCard between March 2000 and November 2004 were subject to an 'interchange fee', which had been deliberately set too high to enable banks to recoup costs.
Commenting on the announcement, Alena Kozokova, competition expert at the NCC, said: "Card interchange fee agreements between banks are a tax on all consumers whether or not they use credit cards, because they push up shop prices as well as card charges."
So, this is extremely welcome news for consumers, and the harbinger of a similar OFT crackdown on Visa's interchange fee arrangements."
The OFT has yet to reveal whether MasterCard will face a mammoth fine for the overcharging practice.
(source: Fair Investment Community)
Saturday, September 10, 2005
Gas Stations Complain of 'Credit Card Cabal' - ultimately consumers pay the price (Orange County Register)
Gas stations complain of 'credit card cabal' - By JONATHAN LANSNER The Orange County Register
It's an eye-opening slice of gasoline math.
If the nation's convenience- store operators are to be believed, far more money's made by bankers at the pump than the actual owners of the gas station.
Store operators say the growing use of credit cards and debit cards by drivers is creating a stiff financial burden. That's because of a little-discussed charge - fees paid by merchants of all types for each card use.
Not only have these fees increased in recent years - they balloon in size along with the price of gas. Worse for these retailers: High gas prices are pinching consumer wallets, and are forcing more fill-ups onto the costly cards.
In the grand scheme, these fees are mere pennies vs. the mega-profits being made by the energy giants that discover oil and refine it into gas.
Still, pennies add up. With gas at three bucks a gallon, the merchant fees may run nine cents per gallon, says Jeff Lenard of the National Association of Convenience Stores.
And the typical store owner's profit after all expenses are counted - including the card fees?
Only a penny a gallon, Lenard insists. "It's been a bad year for us ... and a great year for the credit card companies," Lenard says. Card fees paid by merchants from many retailing segments have become more than just one cost of opening the door for business.
These merchants - both big and small – feel they're victims of the near monopoly stranglehold that card giants Visa and MasterCard may have on the card-payment market. These fees are based on varying complex factors, including the frequency, dollar size and type of card used at a specific store.
Visa and MasterCard's key culpability comes from their work with so-called "interchange fees" that are a hefty slice of the merchant's card expenses. But these two institutions - that act more or less like cooperatives between bankers - say they've done nothing wrong.
These fees, paid to the banks servicing their merchants, go toward the costs of maintaining the payment system and marketing efforts for added card usage. Card marketers say if merchant fees were curtailed or eliminated, they'd be forced to rejigger how they get paid to run these global card networks.
For example, annual fees on cards might go higher. Or late fees and the like could be raised. Perhaps interest rates on outstanding balances would be hiked.
Fee cuts might even result in some folks no longer being offered credit cards. Like that would be a grand blow to society.
PASSING IT ALONG
This is more than an esoteric business-to-business debate.
Face reality: You, the consumer, are paying these merchant fees with higher retail prices passed along by your favorite retailer.
That means that whether you use cash - or use plastic but pay the bill off every month - you are paying credit-card costs. By one count, total merchant fees equal a $230 annual expense per American household.
Numerous merchants are fighting mad about these fees, creating a wave of litigation against card marketers and major banks seeking to break up what's seen as a credit card cabal.
Plaintiffs run from corporate giants such major grocery chains - including the owners of Ralphs, Albertsons and Vons markets – to Mitch Goldstone, an Irvine photography entrepreneur.
Ralphs' owner, Kroger, claims it pays $350 million a year in merchant fees - after rates went up 11 times in five years.
Convenience-store owners' card fees averaged $31,000 per store in 2004 - nearly the $37,000 average for a store's pre-tax profits. (Remember, most of a station's profits come from non-gasoline sales.)
And several major gasoline marketers are again pitching their own credit cards. This spares their brand's service stations the cost of card-marketing fees paid to banks.
Goldstone, owner of 30 Minute Photos Etc., said he was moved to legal action after realizing he pays extra fees if one of his customers uses a card that rewards use with airline frequent flier miles.
"This is not an anti-business thing," says Goldstone, who has frequently championed pro-business causes. "I haven't had one person (outside of card-company reps) tell me I'm doing anything wrong with this."
The merchant fees are a relic.
When credit or debit cards were not an everyday tool, the bankers and the card brands could legitimately argue that they needed extra cash to market their products.
The logic went like this: Merchants who accept cards get more business, so they should be willing to pay card marketers to boost the supply of card users.
But circa 2005, who isn't a card user?
And the dwindling class of people who use checks or cash to pay for goods aren't going to easily switch gears.
Basically, this fee has outlived much of its usefulness.
Just last week, British regulators ruled that MasterCard's merchant fees were too high in that country. MasterCard is appealing the decision. MasterCard's fee agreements with U.K. banks were also found to be anti-competitive. One regulator was quoted as saying the fees were "like a tax on U.K. consumers."
Closer to home, the problem isn't very different: Critics claim the fees are set by a closely linked sect. If there were serious competition, the free marketplace would punish those who overcharged for their goods or services.
Without cutthroat pressures in banking circles, merchants rightfully feel they're stuck - with little ability to aggressively negotiate card-processing prices. Only an ugly alternative exists: Refusing to take cards and lose significant business. Bankers deserve an honest profit for this service, but plenty of merchants feel squeezed by their card fees. In a world where every penny counts, these merchant fees seem out of whack.
Of course, if bankers decided to waive all their fees - gasoline would still be expensive.
CARD FEES CONSIDERED
Here's a look at the U.S. credit and debit card business and merchant fees.
Goods and services sold with cards: $2.23 trillion
Merchant fees paid:$39.2 billion
Average fee rate: 1.74% of purchase
Fees paid from Visa or MasterCard use: $27.6 billion, or 70 percent of the market.
Interchange fees set by Visa, MasterCard and major banks: $20.7 billion
Source: The Nilson Report
(Source: Orange County Register)
Click here to read article
Thursday, September 08, 2005
One of the recommendations during the Sept 7th testimony before the U.S. House of Representatives Committee on Energy and Commerce (PDF) on behalf of the NACS and SIGMA was to urge the House Committee on Energy and Commerce and the United States Congress to "investigate the pricing policies of credit card companies, whose charges make up an ever increasing portion of the price of gasoline at retail outlets, particularly when gasoline prices are high."
Source: National Association of convenience Stores
Tuesday, September 06, 2005
(Source: The Times) - By Joe Morgan, Times Online
The fee levied on retailers to recover the costs of the card system was too high, the watchdog says.
Consequently, all Mastercard purchases in the UK between March 2000 and November 2004 were overcharged.
Mastercard has since changed its fee charging practices, but the OFT says it might still face a mammoth fine.
The OFT found that the so-called interchange fee had been deliberately set too high so that banks issuing Mastercards could recover some extra costs, such as those of offering standard interest free periods.
The scale of the overcharging was highlighted by the fact that in the year 2004 alone, UK Mastercard users spent £43bn in 700 million separate transactions.
The interchange fee paid to the banks by the retailers averaged around 0.9%, or £400m.
Sir John Vickers, OFT chairman, said "this unduly high interchange fee was like a tax on UK consumers."
Also, the OFT said, the collective agreement between Mastercard and its banks meant that they were deterred from negotiating their own, lower fees with shops and their credit card companies.
The excessive charge was simply passed on to retailers who, in turn, recovered it by raising the prices in their shops.
Mastercard denied that its deal with its issuing banks was against the public interest.
"Mastercard plans to appeal against the OFT's decision. For the OFT to claim that the interchange fee agreement either reduced competition or disadvantaged consumers or retailers is simply wrong," the company said in a statement.
"Today's OFT ruling is bad news for both healthy competition and the economy" said John Bushby, general manager for Mastercard in Northern Europe.
The OFT's ruling was welcomed by the National Consumer Council: "Card interchange fee arrangements between banks are a tax on all consumers whether or not they use credit cards, because they push up shops' prices as well as card charges."
Both sides may be planning further action.
The OFT says it is not happy with the new fee arrangements that Mastercard introduced last November. It has threatened another investigation unless the company could show that the new fees were not still being used to recover extra costs. If found guilty once more then the OFT could fine Mastercard up to 10% of its annual worldwide turnover.
The regulator is also investigating the rival Visa credit card system over precisely the same issue, and has hinted strongly that it would treat Visa in exactly the same way.
(Source: BBC News)
Background: The United Kindom's Office of Fair Trade goal is to make markets work well for consumers. Markets work well when there is vigorous competition between fair-dealing businesses. When markets work well, good businesses flourish. The OFT's activities in pursuit of this goal involve: enforcement - of competition and consumer protection rules; market studies - into how markets are working; communication - to explain and improve awareness and understanding. The OFT ruled that a collective agreement setting the fees linked to MasterCard transactions restricted competition and violated the law and deterred marchants from negotiating separate interchange fees. The following ruling is from the OFT website
The OFT has found that a collective agreement between members of MasterCard UK Members Forum (MMF), including most major banks, setting the multi-lateral interchange fee (the MMF MIF) paid on virtually all purchases in the UK made using UK-issued MasterCard credit and charge cards between 1 March 2000 and 18 November 2004 restricted competition and infringed Article 81 of the EC Treaty and the Chapter I prohibition of the Competition Act. In 2004, over 700 million purchase transactions were made in the UK using MasterCard cards with a total value of £42.7 billion. An interchange fee was charged on each of these transactions as a percentage of total transaction value.
The OFT has found that the MMF MIF agreement had adverse effects on competition within the MasterCard scheme and also in relation to other payment systems.
The collective agreement deterred issuers of MasterCard cards and merchant acquirers of MasterCard transactions (see note 2) from competing by negotiating their own interchange fees, different from the MMF MIF. In turn, this reduced competition between merchant acquirers because the MMF MIF – as a standard cost for merchant acquirers – directly affected the merchant service charges (MSCs) paid to merchant acquirers by retailers accepting MasterCard cards.
The OFT also found that the MMF MIF was used to recover 'extraneous costs' (see note 4) for services which were not necessary for the operation of the MasterCard scheme as a mechanism for transmitting payments, such as the costs of the interest-free periods provided by card issuers. Recovering extraneous costs through the MMF MIF resulted in merchant acquirers paying a higher interchange fee to card issuers than if the MMF MIF had been used just to recover the costs of the payment transmission mechanism. This fee was passed on to retailers by the merchant acquirers through higher MSCs. Consumers, including those who do not use MasterCard cards, ultimately picked up the cost for the higher interchange fee through higher retail prices.
As an increase in the standard costs faced by all merchant acquirers, the higher MMF MIF reduced the ability of merchant acquirers to compete on the amount of MSCs charged to retailers.
The inclusion of extraneous costs in the MMF MIF provided a large flow of revenue to card issuers and the incentive to induce customers to hold and use MasterCard cards, for example, through loyalty schemes, advertising and funding the provision of an interest-free period. This distorted competition between the MasterCard scheme and alternative methods of payment such as debit cards, cheques or cash. The recovery of extraneous costs through the MMF MIF also led to a distortion of competition between card issuers within the MasterCard scheme.
Sir John Vickers, OFT Chairman, said: 'The parties to this collective agreement set the interchange fee to derive revenues from retailers and their customers over and above the costs of providing the payment services. This unduly high interchange fee was like a tax on UK consumers.'
MasterCard introduced new arrangements for setting the interchange fee on 18 November 2004; they currently apply to all UK MasterCard transactions. The OFT has concerns that under the new arrangements the interchange fee applying to UK transactions may still be set with reference to extraneous costs and used to recover these costs. The OFT expects to start an investigation into the new arrangements for setting the fallback interchange fee applying to UK MasterCard transactions unless this concern is addressed by MasterCard.
1. A summary of the decision is available from the Competiton Act public register area of the site. The OFT has published a short companion paper (pdf 83 kb) that gives an outline of the investigation and the reasons for the conclusions reached.
2. This Decision only concerns MasterCard branded consumer credit and charge cards as far as they are used for domestic payment transactions in the UK. It does not concern and makes no findings in respect of MasterCard branded business cards (corporate credit and charge cards) or cross-border transactions. Purchases made using a credit or debit card generally occur in a four-party payment card system, which operates as follows: The cardholder purchases the goods or service from a retailer; the retailer sends the transaction details to its bank, the merchant acquirer; the merchant acquirer forwards the transaction details to the bank that issued the credit card, the card issuer; the card issuer pays the merchant acquirer the retail price of the goods or service less the interchange fee; the merchant acquirer pays the retailer the retail price less a merchant service charge and the issuer debits the retail price to the cardholder's account.
3. MMF members comprise the major UK banks that issue MasterCard credit and charge cards and which are licensed to use the trade and service marks of MasterCard in the UK. The purpose of MMF is to enable its members as issuers of MasterCard cards and/or acquirers of MasterCard transactions, to liaise over issues relating to the development of the MasterCard payment card scheme. MMF is responsible for the adoption of rules governing MasterCard transactions specific to the UK (the UK Domestic Rules).
4. The OFT Decision finds that only the costs of services which are necessary for the operation of the MasterCard scheme as a viable payment transmission mechanism can be recovered legitimately through the MMF MIF. Costs for the provision of other services are considered 'extraneous costs'. The Parties to the MMF MIF agreement have not justified the recovery of extraneous costs through the MMF MIF.
5. The EC Treaty and the Competition Act 1998 both prohibit anti-competitive agreements. Article 81 of the EC Treaty ('Article 81') and the Chapter I prohibition of the Competition Act ('the Chapter I prohibition') apply to agreements which prevent, restrict or distort competition. EC Regulation 1/2003 ('the Modernisation Regulation'), which entered into force on 1 May 2004, requires the OFT, as a national competition authority of a Member State, to apply Article 81, as well as the Chapter I prohibition, when the Chapter I prohibition is applied to agreements which may affect trade between Member States. The OFT has informed the European Commission of this decision under the Modernisation Regulation.
6. Prior to making today's Decision, the OFT issued a Rule 14 Notice in September 2001 and a supplementary Rule 14 Notice in February 2003 (see statement 11/02/03). A statement of objections giving notice to parties of a proposed decision was issued on 10 November 2004 (see press release 184/04).
7. The OFT is currently investigating an agreement between Visa members on the UK Domestic MIF applying to Visa transactions. This Decision makes findings only in relation to the MMF MIF agreement. However, where the OFT applies competition law to other interchange fee arrangements, it expects to do so in a consistent manner.
(source: UK OFT)
Friday, September 02, 2005
Open Letter to Visa CEO: suspend gas station credit card interchange fees to help motorists save ~$1.50 per fill-up
September 1, 2005
Mr. John Philip Coghlan
Chief Executive Officer
123 Mission Street
San Francisco, CA 94105
Dear Mr. Coghlan,
Congratulations on your new role as CEO of Visa USA. Your leadership in empathizing with retailers is most appreciated, as were your reflections that your new challenge is to build a better relationship with merchants.
Based on the precedent set by Visa USA after the Asian tsunami disaster, I understand that the member financial institutions of your credit card association agreed to suspend certain credit card interchange fees. The catastrophic events caused by last week's Hurricane Katrina is another opportunity to provide similar comfort to the region affected.
Due to the record-setting gas prices that motorists are paying, as editor of the Credit Card Interchange Blog: WayTooHigh.com, I ask you to consider also suspending the interchange fee for service stations - which can be as high as $1.50 per fill-up. This action will provide immediate assistance to millions of consumers in advance of the Labor Day holiday and help promote commerce at a time when our nation is faced with extreme financial hardships.
This request is provided in my capacity as editor of the Credit Card Interchange Blog and is not related to my antitrust litigation. As a staunch consumer advocate, many of my prior national grassroots initiatives played a role in supporting commerce. This request does not come without personal sacrifices and participation from millions businesses across the country. For instance, my online boutique photo service already provides a 50% discount to all military families in the U.S. and abroad.
I hope you will consider this request to suspend gas station interchange fees so that the dealers can pass along the savings to motorists.
Thank you for your personal attention.
Editor - Credit Card Interchange Blog: WayTooHigh.com
MasterCard, the world's second-largest credit-card brand, has announced plans to pursue a float that could value the company at more than $US10 billion ($13 billion).
By going public, MasterCard can raise capital to mount a stronger charge against Visa International, its much larger rival. But the move could also be an effort to try to insulate the banks that issue its debit and credit cards as law suits against MasterCard mount, analysts said.
MasterCard and Visa are payment associations controlled by thousands of members ranging from small credit unions to global banks. They are marketing machines and policy makers that set the fees and rules merchants must follow, but they do not directly issue cards to consumers; that task is left to their member banks.
MasterCard said it planned to sell 49 per cent of the company to the public, which will hold 83 per cent of the voting rights in the company. The 1400 financial institutions that are members of the card association will retain 41 per cent of the public company. They will also get an undisclosed portion of proceeds raised in the public offering. The remaining 10 per cent stake in MasterCard will be controlled by a newly formed charitable foundation.
The credit card landscape has changed rapidly in recent years. Today, Visa controls nearly 60 per cent of the dollar amount charged on credit and debit cards around the world. MasterCard controls around 27 per cent, according to The Nilson Report, a newsletter that tracks the industry.
MasterCard said $US650 million from the public offering would be used to finance an increase in capital spending.
David Robertson, publisher of The Nilson Report, said: "The money will be used, in part, to better compete for co-brand deals with airlines and large merchants worldwide."
But a much bigger factor is law suits on various fronts. Last year, for example, a court ruled that banks, previously restricted to issuing either MasterCard or Visa cards, could offer any company's cards.
Additionally, MasterCard, Visa and some banks have been named in numerous anti-trust suits filed by US retailers, who contend that the payment associations and their member banks illegally fix the transaction fees charged to merchants every time a card is swiped. Last year, those charges, known as interchange fees, totalled about $US25 billion.