Saturday, September 10, 2005

Gas Stations Complain of 'Credit Card Cabal' - ultimately consumers pay the price (Orange County Register)

Sept 11. Sunday Orange Country Register "Your Money" Jonathan Lansner column...

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.


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.


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)