Credit card interchange fees draw ire

The owner of Rapid Roberts gas and convenience store chain has seen the number of customers using credit cards to pay for their gas increase dramatically in recent years due to a number of factors, from pay-at-the-pump technology to prepay requirements that help prevent drive-offs.

But while credit cards add convenience and speed for both retailers and consumers, they also add fees – notably interchange fees, charged by the credit card companies to retailers who then have to pass costs to customers in the form of higher prices.

Legislation making the rounds in several states, including Missouri, and on the federal level, aims to give retailers a voice in controlling interchange fees.

David Overfelt, president of the Missouri Retailers Association, said there’s no way to tell exactly how much retailers pay in interchange fees, though he said the most common estimate is between 2 percent and 3 percent of each credit card transaction. Debit card transactions processed with personal identification numbers aren’t subject to interchange fees.

“It’s a pretty dramatic impact. The (interchange rate) stays the same whether gas is $1 or $4, so the higher gas goes, the more the expense,” Wilson said. “We’re paying more in fees than we are making profit on the gas.”

Wilson’s story is not unique; retailers paid an estimated $42 billion in interchange fees in 2007, according to research for a bill currently making its way through the U.S. Senate.

“In the retail industry it’s ... one of the largest hidden fees on the consumer out there today,” Overfelt said.

Numerous retailer associations and large retail companies have pressed for legislation giving the retailers more input into the amount of interchange fees; bills were proposed this year in 15 states, including Missouri, that would limit the fees or give retailers access to more information about them. Similar legislation is being considered in both the U.S. Senate and House of Representatives.

Senate Bill 5546, – co-sponsored by U.S. Sen. Christopher “Kit” Bond, R-Mo. – would give retailers the ability to negotiate interchange fees with card companies and financial institutions and create a system of judges to arbitrate when negotiations fail.

“The bill says any benefit or savings the retailers would have from negotiations with the financial institutions would be passed on to the consumer,” Overfelt said.

“The main key is for retailers to have more input on how the rate is set.”

How it works

Interchange fees are part of the credit card transaction process, according to information from Visa.

A typical credit card transaction involves four parties: the merchant selling the item; the financial institution, called the acquirer, that accepts Visa payments for the merchant and makes sure those merchants get paid for the transaction; the issuer, which provides consumers with credit cards and lends consumers the money for the transaction; and the cardholder.

“Retailers nationwide have complained about the nature of these fees and how high they are compared to where they should be if it was a truly competitive market,” Overfelt said.

“Of all the cost drivers, this is one specific to retailers, and it’s been identified by every class of retailers and every association as something that every consumer needs to be aware of.”

Consumers need to be aware, Overfelt said, because retailers have to build the fees into the cost of their merchandise, meaning higher prices for all consumers – including those not paying by credit card.

Card companies have said the fees are part of doing business, helping to defray the costs that come with overseeing a worldwide card system.

A Visa brochure on interchange fees notes that the company respects the right of any business to lower its cost. Visa’s stance, however, is that interchange fees are the most effective way to manage the network for all entities involved in credit card transactions.

“Any inappropriate intervention into interchange, if successful, would result in fewer payment choices and a reduction in benefits for both consumers and merchants, and possibly even higher check-out costs,” the brochure reads. Visa maintains that merchants can counteract some of the impact of interchange fees by offering discounts to customers who use cash or debit cards.

Leading the charge

Effects of interchange fee legislation could be huge. The U.S. Department of the Treasury estimated that electronic payments exceeded paper payments as early as 2002, and the U.S. Small Business Administration notes that in 2007, more than 433,000 Missouri businesses accepted credit cards.

While retailers agree that some cost is necessary for credit card companies to process transactions, the difficulty for the retailers comes in their inability to negotiate how much the fees are, or in many cases, to see a description of those fees.

Interchange fees are hitting Wilson’s convenience stores especially hard because of three factors. The implementation of pay-at-the-pump technology has persuaded many customers to use cards for their purchases. Higher gas prices have forced most gas stations to implement prepayment policies, pushing even more customers to cards.

And the third factor, Wilson said, is the economy in general.

“What we’re seeing a lot now is that people are stretched to the limit and using any available credit they have to get their gas to get them through until the next payday,” Wilson said. “I hear that a lot.”