The most profitable item at Patricia Orzano’s 7-Eleven store on Long Island is coffee. Slurpees are a distant second.
But as more customers use plastic to pay for even small purchases like these, she has watched a growing share of her revenue vanish in a stream of credit and debit card fees that retailers say raise the price of goods and sharply lift the cost of doing business.
Merchants across the nation, from powerhouses like Wal-Mart and Home Depot , to gas stations, mom-and-pop restaurants and 7-Eleven, have spent years unsuccessfully fighting the biggest of these costs, known as an interchange fee, which generates an estimated $40 billion to $50 billion in income annually for banks that issue credit cards.
But after Congress passed a law last month to protect consumers from excessive fees and interest on credit cards, merchants are mounting a fresh offensive.
This time, they believe the momentum in Washington has turned in their favor. Legislation is winding its way through Congress, a government audit has been ordered and petitions are surfacing in hundreds of convenience stores, including Ms. Orzano’s 7-Eleven, encouraging customers to voice their opposition to the fees. “Congress sort of already illustrated the willingness to take on the credit card companies and the big banks,” said Keith Jones, a lobbyist for 7-Eleven. “We just feel like the job is half done.”
And while large and small banks often clash on political agendas, they have formed a united front, joined by payment networks like Visa and MasterCard , to prepare for a furious battle on Capitol Hill. With profit from credit cards likely to diminish because of the new laws, they are determined not to absorb another major hit.
“It’s a big deal to them, and they would be fully engaged in it,” said Kenneth J. Clayton, senior vice president for card policy at the American Bankers Association.
Every time a consumer uses plastic, about 2 percent to 3 percent of the charge goes to banks and payment networks, which price the fee differently in different countries. Of that, the interchange fee is paid to the cardholder’s bank, and at roughly 1.8 percent of each purchase in the United States, according to June report by J.P. Morgan , it is the largest and most controversial of these costs.
But retailers may have a tough time convincing Congress that consumers would benefit if the effective interchange rate, which has increased slightly in recent years, is dialed back. Many other countries, including Israel and Australia, have required banks that issue cards to reduce the fee. Yet there is little evidence that the savings were passed along.
In Australia, where regulators required banks to cut the interchange rate for Visa and MasterCard purchases to 0.5 percent from 0.95 percent, the banks offset their loss by reducing rewards programs and raising annual fees, according to a 2008 report by the Government Accountability Office.
A similar outcome could happen here, banks and card companies say. In response to 7-Eleven’s petition drive, MasterCard said the convenience store chain was really asking its customers “to claim that they want to pay more for their payment cards so 7-Eleven can increase its profits.”
Bill Sheedy, Visa’s president for North America, added: “We really don’t think the legislation is going to move forward.”
Banks say they incur substantial risk when offering credit cards, and must make enough of a return to continue to extend credit. Reducing interchange fees would cut profit at both the largest and smallest financial institutions, including community banks and credit unions, Mr. Clayton said.
Of $100 charged to a Visa card, the merchant’s bank receives about $2.25, according to a hypothetical example used by J.P. Morgan in a June report. The bank forwards about $1.80 — the interchange fee — to the cardholder’s bank. Both banks pay a fee to Visa, 10 cents apiece. The merchant’s bank then pays another nickel to a third-party processor and keeps the remaining 30 cents.
While the fee for each purchase is small, combined credit and debit card payments at merchants have almost tripled over the last decade, to more than 58 billion swipes last year from about 20.7 billion in 1999, according to data compiled by the Nilson Report, a journal on the payment industry.
Merchants say that makes their aggregate expense from the fees enormous — and there is no leverage to ratchet it down. “You’ve got to accept the card and pay whatever price the credit card companies want to charge, and by the way, they won’t talk to us about it,” said Mr. Jones, the lobbyist for 7-Eleven.
At Target, for example, interchange fees represent the second-largest store-level expense, behind payroll. The costs are similarly eye-popping at Home Depot, where officials say they top the price of health care insurance for employees. “The amount of money we’re spending on interchange would put 10 associates in each of our stores,” Dwaine Kimmet, vice president of financial services for Home Depot, said at a recent conference on credit card fees.
Even some government agencies have not been able to negotiate lower fees. According to a recent G.A.O. report, federal agencies paid out more than $200 million in interchange fees in 2007, the most recent year for which data was available.
Some retailers simply refuse to accept certain credit cards. Costco , the nation’s largest membership warehouse chain, negotiated a lower interchange rate with American Express and does not take Visa and MasterCard in its stores.
And last month, United Airlines began to force a small number of travel agencies to absorb credit card fees of 2 percent to 3 percent for ticket bookings, a trend that agents fear may distort ticket economics if other large carriers follow suit. United is not passing the fee on to consumers who book directly with the carrier.
Merchants say the cost may have been justified when credit card transactions were largely done with paper, making processing far more cumbersome. But with bigger volumes and new efficiencies from technology, they argue, interchange fees are simply a cash cow for card companies that wind up lifting the costs of all goods. The credit card industry says retailers’ costs have surged simply because consumers are using plastic for purchases they would never have dreamed of a decade ago, like a cup of coffee or a Slurpee.
Of course, the surge in transaction volume has been a boon for credit card companies: Visa’s stock price is around $60, and MasterCard’s is around $165. While they are down from highs hit just before the financial crisis, they are still well above the share price of card-issuing banks like Citigroup and Bank of America .
Still, while legislation on interchange fees would not have stood a chance a few years ago when the economy was buoyant and banks were not under the political spotlight, the winds on Capitol Hill have shifted as public anger at banks — and credit card companies — has grown.
“The target is still painted bright red on the forehead of every credit card issuer,” said Robert Hammer, a credit-card industry consultant. “It is a brutal, brutal year.”
- Slideshow: Largest Bank Failures of 2009
- Slideshow: The World's Safest Banks
At a 7-Eleven in a blue-collar neighborhood in St. Louis, the owner, Mike Foster, is hoping the petition in his store will help convince Congress to approve curbs on interchange fees. He said he can make adjustments to curb other expenses in his store, but he cannot do anything to change interchange fees, which cost as much as much as $1,600 a month.
“It keeps getting bigger and bigger and bigger,” he said. “And I got zero control over it.”